Gildan Activewear Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Gildan Activewear Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Sophie Argiriou, VP Investor Communications. Please go ahead.

Thank you. Good morning to all and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the third quarter of 2020. We also issued our interim shareholder report containing management's discussion and analysis of consolidated financial statements. These documents will be filed with the Canadian securities and regulatory authorities and the U.S. Securities Commission, and will be available on the Company's corporate website. On the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rhod will take you through the results for the quarter and a Q&A session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the Company's future results. I will now turn the call over to Rhod. Rhod?

Thank you, Sophie. Good morning and thank you all for joining us on our third quarter call. We hope that you and your families are healthy and staying safe. This morning, we posted results reflecting a strong recovery for the third quarter. Sales came back nicely more than doubling from the second quarter. We saw good retail performance with sales up year-over-year driven by momentum in underwear. And although the pandemic continues to weigh on the demand for principles used for large events, other areas within this part of our business are growing and mitigating the impact. Further, we're making good progress with our Back to Basics strategy, as we continue to focus on servicing our customers with a more streamlined product portfolio, which in turn is allowing us to remove complexity from our business and fully leverage our manufacturing platform to drive market share growth. In this regard, during the third quarter, we saw manufacturing cost efficiencies from our Back to Basics strategy come through as we brought back more capacity online, and together with a sequential improvement in product mix as sales improved, we generated a gross margin of 22.5%, a strong recovery from the second quarter. This was achieved despite a continuing year-over-year impact from period costs related to below normal manufacturing capacity utilization rates, and albeit better but suboptimal product mix given the COVID related environment. Moreover, we kept a strong focus on managing our SG&A expenses which came in at 10% of sales. So adding all this up, we returned to a profit in the quarter with GAAP EPS of $0.28, adjusted diluted EPS of $0.30. We were also very pleased with our strong free cash flow generation, $137 million in the quarter or on a cumulative basis $300 million in the last few quarters as we continue to tightly manage our working capital and capital expenditures. Finally, our liquidity position at the end of the quarter further improved to $1.3 billion, leaving us in strong financial standing. Before I get into the specifics of the quarter’s results, I would like to provide a status update on our manufacturing operations. With improving sales across our channels of distribution, our team did an outstanding job ramping up production levels during the quarter, bringing back our factory employees to a safe workplace and navigating through the requirements of safety protocols and social distancing measures in this new operating environment. This is not without its challenges, as many in the industry are facing. But nonetheless, with the expertise of our team and the benefit of owning and operating vertically integrated manufacturing operations, our production levels by the end of the third quarter are back up at 75% of overall pre-COVID capacity, and I can say we've continued to bring more production back on as we've moved into the fourth quarter, as our manufacturing team continues to navigate well through this environment. Turning to our operating results, we generated sales of $602 million in the quarter, down 18.6% versus last year, but significantly better than the 71% decline in the second quarter. October sales of $456 million in the quarter were down 26.3% while sales in the hosiery and underwear category totaling $146 million were up 21.2%. Overall Activewear sales was mainly due to lower sales volumes and principles down 21% in North America and 25% in our international markets, together with unfavorable product mix, and the impact of the continuation of higher promotional discounting in the U.S. imprintable channel. As we continue to drive for share in this environment. Although product sales were down year-over-year for our imprintables products, similar levels we saw when we exited the second quarter, trends remain relatively stable through the quarter. On average, POS in North America was down in the 15% to 20% level and down 25% in international markets. Putting these numbers together, you can tell we saw further in principles distributor destocking in the quarter in North America. However, the level of destocking is considerably from what we experienced in the second quarter. On the retail side, as I mentioned earlier, growth was driven by the strength of our underwear sales, which doubled in the quarter, reflecting strong market share gains related to our men's private brand and Gildan brand programs. While hosiery sales were flat sequentially, sales were down slightly compared to last year. Gross margin of 22.5% in the third quarter was down 490 basis points from last year as manufacturing efficiencies generated from our Back to Basics initiatives and lower raw material costs were more than offset by a $15 million or 250 basis point impact on gross margin related to unabsorbed overhead costs due to lower manufacturing utilization. Gross Margin was also impacted by higher end imprintables promotional discounting and unstable product mix compared to last year. Although product mix impacted margins by 280 basis points in the quarter on a sequential basis thus improved significantly compared to the 600 basis point impact we saw in the second quarter. Moving on SG&A. SG&A expenses totaled $61.5 million or 10.2% of sales down $17.5 million over last year. The decrease stemmed from cost savings related to Back to Basics initiatives, including lower compensation expenses resulting from permanent workforce reductions announced last quarter as well as lower volume driven distribution costs. Adding up all these elements operating income totaled $68.8 million in the quarter, and $73.5 million on an adjusted basis, down from $117.9 and $122.3 million respectively in the third quarter of 2019. After financial expenses of $11.4 million in the quarter net earnings totaled $56.4 million or $0.28 per diluted share and $59.2 million or $0.30 per diluted share on an adjusted basis. Turning to free cash flow in the balance sheet. As I mentioned at the beginning of my remarks, we delivered another strong quarter of free cash flow performance, generating $137 million in the quarter, bringing us to a two quarter cumulative total of over $300 million of free cash flow generated thus far as we move through the pandemic. Further, we expect to build on this level next quarter with the continued strong focus on working capital management. Our key customers have continued to manage well as they move through this environment and our days sales outstanding which have grown in the second quarter are now well normalized. Inventories at the end of the third quarter were $939 million down 9% sequentially and 10% compared to last year as we continue to focus on carefully managing raw materials and our finished goods level. Accordingly, at the end of the third quarter, the company's net debt stood at $850 million. Our leverage ratio for debt covenant purposes is two times net debt to adjusted EBITDA. And we ended the quarter with approximately $1.3 billion of liquidity, which provides us strong flexibility as we move towards 2021, yet still uncertain environment. So overall, a good quarter given the circumstances. Before opening the call to questions let me leave you with some commentary on what we are currently seeing in the marketplace. Moving into the fourth quarter, POS trends across our imprintables channels have further improved averaging for the month of October down in the 10% range in the U.S., and international markets down between 20% and 25% compared to last year, depending on the market. On the retail side, sales for most of our products are currently up from last year thus far in the quarter. While this is an encouraging start to the fourth quarter, we nonetheless remain cautious given the ongoing trajectory of the pandemic, particularly with news of the recent surge in cases globally, and the unclear global economic outlook, and the impact all of this could have on the demand for our products. Having said that, we feel the actions we have taken heading into and during the pandemic have provided us with a financial and operating flexibility to continue to navigate well through the crisis. We are pleased with the continuing progress on our Back to Basics strategy. And we will continue to focus our efforts in this regard where we can control outcomes regardless of the global environment. For example, having completed our imprintables skew rationalization initiative last quarter, we're currently performing a strategic retail product review, which we expect to complete by the end of the year, as we previously communicated. To the extent our review leads to a decision to rationalize any part of our retail product offering a related inventory charge could be incurred in the fourth quarter, which we do not currently expect to exceed $25 million. So overall, good work done to-date on our Back to Basics strategy, but more to do as we fundamentally strengthen our competitive position in order to allow us to emerge from this pandemic as a stronger company. Finally, you would have seen that we called out in our press release the recognition that we recently received related to sustainability in the Wall Street Journal's inaugural ranking. We are particularly pleased with this recognition as this reflects a strong culture within Gildan regarding sustainably managing our business. On behalf of the rest of the senior management team, I would like to finish this update by thanking the whole Gildan team who operate with this mindset every day. Thank you. We’ll now turn the call back over to Sophie.

Thank you, Rhod. Before moving to the Q&A session, I ask that you limit the number of questions to two and we will circle back for a second round of questions if time permits. I'll turn the call back over to the operator for the question-and-answer session.

Your first question is from Paul Lejuez with Citibank. Paul, your line is open.

Hello.

Yes, Paul.

Can you hear me?

Yes, we hear you.

I'm just curious if you've seen any improvement in the promotional levels within the imprintables channel this quarter versus last quarter, curious if there are any categories that stand out as being more or less promotional, just promotions across the board. And you mentioned, the sales trends are better this quarter, curious if anything has changed on the promotional front? And then totally separate, I'm just curious about your raw materials outlook for the first half of ‘21? Thanks.

Yes, maybe on the promotion, look we've commented that we are continuing to drive our Back to Basics strategy, which includes continuing to price and promote our products. And basically, this is allowing us to continue to generate market share and improve our POS where we're spending and promoting our products in the fashion basics category. Open-end basic T-shirts and our fleece products are the main three areas that we are promoting and those are the three big categories that are driving our POS and market share gains as we speak. So, it's not across the board promotion; it’s specifically these three categories today.

Second part of your question, Paul was on raw materials. And I think if you look at raw materials, I mean, cotton prices are going up. But I think if you obviously, if you look at the lag time, in the in the first half, you won't necessarily see that. But obviously, there is some upward pressure as we go forward.

Okay. Thank you. Good luck.

Thank you.

And your next question is from Chris Li with Desjardins.

Hi, good morning. Hey Glenn I know we're still far away from the new normal, but just curious if you can give more colors on what drove the POS improvement from Q3 to October, because considering your end-user demand, that's quite impressive improvements. So if you can provide some more colors on that will be much appreciated? Thank you.

We were quite pleased with the improvements we saw in Q3. Our industry resembles the airline sector, with travel, tourism, sporting events, and concerts, all of which have not fully returned, partly due to social distancing concerns. However, the positive aspect is that our products have proven to be more resilient than expected, with casual stay-at-home lifestyles driving sales. There are now alternative marketing methods available, and our industry is operating efficiently. We're seeing significant product placements and an increase in online reselling by retail customers, which has been strong. Ultimately, we believe we are well-positioned to maintain an effective supply chain that adapts to changes in market trends and consumer behavior. This adaptability is a key strength, allowing us to gain market share despite ongoing issues related to social gatherings and distancing. Although we don't have all the answers, the situation is encouraging, and as we enter October, we are seeing continued growth in sales and market share.

Okay, that's helpful. Maybe a quick follow up. You mentioned I think, last quarter that your expectation is still that by next year, sales will recover to around 80% to 85% of the pre-COVID level by 2021. I know there's still a lot of moving parts. But is that still your view?

From our current perspective, I would agree that looks optimistic. We are observing a slight improvement in Q3 so far this quarter, although the pandemic situation appears to be deteriorating, particularly in Europe. This will influence our performance, but I believe we are well positioned. We have good control over our manufacturing capacity, allowing us to adjust in response to market demand. Our inventory levels are healthy, and our debt has decreased. We are committed to generating cash flow as we head into Q4 and Q1 while maintaining our focus on inventory management. Our overarching strategy, which we call Back to Basics, focuses on enhancing product availability, driving prices, and gaining market share through pricing, all while reducing the working capital needed for operations. Collectively, these efforts will significantly contribute to our recovery and increase our market share.

Okay, that's helpful. And best of luck for the rest of the year and continue to stay safe.

Thank you.

And your next question comes from the line of Vishal Shreedhar with National Bank.

Hi, thanks for taking my questions and congrats on these results in the tough period. Regarding your wholesaler customers, wondering if you can update us on the state of the inventory in the wholesale channel and now that we've seen restocking for some period of time, is it reasonable to expect restocking in the coming quarters and also maybe just tag along to the financial health of the average, wholesale customer?

The health of our customers aligns with our own, as they have experienced a significant recovery in the industry. Since most products are sold through our distributors, our recovery has led to theirs as well. They have also effectively managed their working capital and financial stability. Overall, we are all moving in the same direction. Regarding inventory, it likely reached a low at the end of Q3, but it is stable and should see some growth in Q4 as demand continues to rise to support future sales. Our customers are in good condition, and we are quite optimistic about our current situation.

Okay. I appreciate that color. And just a follow on to that, with respect to your own manufacturing capability and the restrictions imposed associate with COVID-19. Can you talk about Gildan’s ability to make sufficient inventory to reflect this seemingly unproven demand outlook? And do you foresee any problems related to COVID-19? And perhaps, social distancing and restrictions on your manufacturing footprint?

One of our strengths is being a vertically integrated manufacturer. This quarter’s performance and the restoration of our production capability reflect the efficiency of our manufacturing team. They did an excellent job, bringing our capacity back to 75%. Although this level is lower than our sales, our focus has been on driving free cash flow and reducing inventories. We are actively working to increase capacity to meet demand as we head into Q4. We have the flexibility to adjust our production pace and can easily scale back if needed. We are prepared to manage any market changes. Our available capacity allows us to continue growing to 100% of pre-COVID levels, with installations already in progress following the closure of our Mexican facilities in March, which we are now repurchasing in Central America. Additionally, we are planning an expansion in Bangladesh set to launch in Q2 of 2022. From a manufacturing standpoint, we are well-positioned to support sales growth. Conversely, if sales decline, we can manage that as well. We have implemented all necessary protocols in our factories, including social distancing, transportation measures, daily employee testing for temperature checks, and sanitation procedures. While COVID is a relevant factor in Central America, we have been able to operate effectively and maintain control in our factories so far.

Thank you.

And your next question is from Sam Khan with RBC.

We're having trouble hearing you.

And your line is open. Okay, question was withdrawn. Your next question is from Stephen MacLeod with BMO.

Thank you. Good morning.

Good morning.

Good morning.

I just had a couple of questions on the imprintables segment or actually sorry one question on the imprintables segment and then one other. In terms of the imprintables, can you just talk a little bit about categories, where you saw incremental strengths between Q2 and Q3 and then where you see an incremental strength between Q3 and into October?

Thank you. Good morning.

Great. Thank you. And then on the margin side you had some nice growth in Q3 sequentially. And you talked about sort of margins normalizing or certainly the mix impact normalizing. And can you talk a little bit about how you expect that to evolve? And then do you still view that 30% level as potentially attainable as you get into 2021, 2022?

Yes, if you look at the margin, Stephen how it's evolved, right, we have seen the impacts that we called out as we move from Q2 to Q3, and you can see them continue to evolve as we move into Q4. So we had in Q2, we had a lot of period costs in Q3. We also had period costs; we called it out 250 basis points, right as we move to our manufacturing, on average about 70% utilization 75% at the end of the quarter. And then as we move into Q4, that will improve as we continue to ramp up our production. So effectively, that'll diminish. On the mix side, we have seen the evolution of the mix is quite negative in Q2, Q3 also negative it’s 280 basis points in fact. And then as we move into Q4, effectively as the mix starts to normalize, that should diminish. We still have mixed impacts, like Glenn called out, bridge products, the pockets things like those, but they do have a negative impact. And if that's not in your mix, you don't get that. But effectively as we continue our sales continue to come back. We do see positive mix overall. Fleece is an area where effectively, we probably if you look at Q3, effectively, some of that has shifted into Q4 for a number of different reasons. And that drives positive margin. So overall, I would say our margin is evolving as effectively everything normalizes and as we drive to ‘21. If you look on our longer term targets, we very definitely are driving towards those targets. It's going to take some time. We call that out last quarter; effectively. Previously, we had said that we thought we would be able to pre-COVID hit those targets by the end of ‘21 on a run rate basis. I think we have to push that back now given what's going on from a COVID perspective, right. Because you've got to get to a more normalized environment overall where our business is back to where it was in 2019. But we're still going after those targets.

Okay, that's helpful. Thank you, and congrats on the great quarter.

And your next question is from the line of Mark Petrie with CIBC.

Good morning. Working capital has been very strong. Rhod, you expressed optimism for Q4. Does this imply a more permanently efficient operating structure due to the reduced skew count? What potential do you see for further reductions in working capital? Are we at a stable level now, especially with the expected benefits in Q4?

Unlike you work on it right away.

If you look at the working capital, as we simplify our overall structures, we've effectively worked on our product portfolio and everything associated with Back to Basics will translate ultimately into improved working capital, better terms. And so we've done a lot and you're seeing the benefit come through. But we still have more to do, as we said; we were working on our retail portfolio. And we'll be doing that in Q4. And those types of initiatives will ultimately translate into a better working capital performance as you move forward. So I wouldn't say that we've done; we've done a lot, but I wouldn't say we're done yet, Mark and we will be looking to drive better efficiency as we move into ‘21 on the back of I would say stronger performance in ’20.

And then not only does it improve our working capital, but also going to lower SG&A and improve our efficiency of our distribution centers and other parts of our business. And also, it will allow us to keep more inventory, even though our inventories are coming down, we're going to have more inventory in the area so that we can improve our availability in our service to our customers, basically. So it's a win-win, less inventory, lower cost, and better availability. That's what the basis is all about.

Yes, understood. Thanks. And just with regards to the performance in retail, and your private label program, how much and the growth there, I guess, also in the Gildan brand too, but predominantly private label, it sounds like so how much of the growth there was increased shelf space versus improving velocity? And is there any visibility to any further change in shelf space or are you stable with where you are at today? Thanks.

Well, I think that the growth is because of the fundamentals, based on our philosophy it really intended to pay right. So we've continued to take share, our products are doing very well. And we're looking to continue growing as we move forward in the future. So we're pretty excited about the level of growth. And this is a continued operation as we move forward.

Okay, appreciate all the comments. All the best.

And your next question is from Luke Hannon with Canaccord.

Thanks. Good morning. Glenn, I was wondering if you could give a little bit of color on the retail segment of the Activewear division, just curious to know what the trends are like for the different sort of end customers there specifically like the retail, the specialty channel, and maybe mass and maybe just some of the other different customers and how POS is trending amongst those?

Yes, retail sales overall, were flat, but our mass products were actually up and some of our products that we sell to global lifestyle brands were down in the quarter. So our mass is actually doing very well.

Okay, thanks. And Rhod, you touched on that manufacturing policy was 75%. I think, as of the end of the quarter, just curious to know if that number has changed significantly since quarter end?

We pushed it up, right. So effectively, we're 75%, and we've continued to bring it up, as we move into Q4.

And we're bringing it up in line with the trends of POS in the industry, right? Still keeping in mind trying to manage working capital and inventory levels, so that's sort of how we distribute that.

Good. Thanks for the comments.

And our next question is from Brian Morrison with TD Securities.

Good morning, I just want to follow up on that point, actually, Rhod, can you just maybe put a number to Q4 capacity utilization, maybe an early outlook for 2021? As it's going to impact, expensive period cost? And then just in terms of mix, are you simply referring to lower fleece and higher retail in terms of the weight on gross margin right now?

So look at capacity utilization, I mean, I think, again, we're not giving guidance for the quarter. But effectively, I think, given where we are currently running, probably around 85% is a good number, right ultimately, probably where we're going to settle up for Q3 and Q4. And then, if we look at the gross margin, effectively, the impact of gross margin, it does normalize, as we revert back to, I would say, the historical levels, and as our sales move up. Because, again, I would say across all of our product lines, right, we get a better mix, I would say, on average, but if you look at Q4, I mean there will be some things that will drive it, as I said, as well, as you touched upon period cost will help. Fleece is going to help more generally. And so again, I think the way to think about that, that mix impact, we were 600 basis points, we were 280 basis points down this quarter. And then I would say there's just a steady progression as we keep moving forward as our other sales come back.

Okay, thank you. And then Glenn, just in terms of opportunities with global travel restrictions and your cost structure improvement and obviously more just-in-time requirements. I'm curious if you're seeing heightened opportunities in GLB, your private label that's typically outsourced from Asia?

We're seeing a lot of demand for large screen printers that service all the retailers and online sellers. I mean, that's really been a big catalyst to our POS growth. Because look, at the end of the day, people that have brands and want to repurpose a shirt, they can take a Gildan product in their fashion basic or fleece, all of our garments have tear away labels, they can quickly change the label on the product and rebrand all of our products. So, we're a conduit for success for quick turn on shoring. I mean, just in general, when people look to make regularly a screen printed of that product, I think that the part about the bigger picture about the on-shoring global supply chain. And I think that's still a big opportunity for us as we move into ‘21 because a lot of big companies, retailers, are large users of product have been fending off COVID and managing their overall global inventories and crisis management, etcetera but that settles, and people look to grow and how they're going to manage your business as they go forward. Obviously, the lack of travel, the convenience of purchasing in this hemisphere, I think is going to be a big plus for us, and also the speed of five weeks versus the five months almost major. So I think we're well positioned. Right now we're getting a lot of that at once. This has been scripted that's being servicing a lot of the mass retailers as well as the online sellers. And I think that the next step for us is to see some big opportunities potentially coming our way as the markets recover.

And so, are you stating that based on discussions today or just your intuition?

My intuition and partly some discussions? Yes.

Okay. Thanks very much.

Your next question is from Jim Duffy with Stifel.

Thank you. Good morning. Hope you guys are doing well. I have a question on the retail market landscape. Can you speak to any differences that you're seeing in POS versus your reported sales? I'm curious to what extent growth in 3Q was replenishment of depleted inventories exiting in 2Q, how that compares to POS trends. And then, if you could speak about quarter-to-date, POS trends and how that fits with what you're seeing in your shipments that would be helpful?

Well, Q3 is obviously the biggest part of the year for underwear in particularly so and have all of our POS was driven by point-of-sale. And basically, we're actually chasing product right now to be honest with you because of our sales were so strong. So it's all point-of-sale, we've seen POS slightly come down a little bit from these levels in the first part of October. But that's seasonal; you have a spike back to school. And then basically, you have a big spike towards the end of the holiday season. So I thought overall, we're very encouraged. It's all based on growth on point-of-sale, consumers buying our products, basically at retail.

Thank you. Glenn can you comment on the competitive environment in imprintables, or competitors matching your promotional stance? And then, it sounds like you think distributor destocking is complete here. At what point would you expect to get to a more normalized pricing environment?

Well, we think to look at our objective is to leverage the Back to Basics strategy. And the first way of our back to basic strategy actually spent skew rationalization is price availability. So we're going to continue to be very aggressive on price for the foreseeable future. We think we can do that still obtain our marginal taxes, because we're going to be driving manufacturing efficiencies as well as SG&A reductions associated with our Back to Basics strategy. So, our objective right now is to continue to build our leadership position, right market share in the categories that were underdeveloped, particularly in the fashion basic principles category. And we think we're going to do this foreseeable future through 2021 is definitely our plan. And it's paying dividends because we're seeing market share growth. And we're also seeing, I think we're getting market share gain, and gaining market share through the pricing strategies where you can continue to do it. We don't believe that our competitors have the staying power to continue this type of pricing is because we're leveraging our low-cost manufacturing, and they don't have the same cost structures. So maybe some short-term competitors matching, but on a longer-term basis we believe that price and availability will win for us and we're going to get back on the offensive and making sure that we continue to drive share in all categories.

And just one quick follow up, if I may related to that, is the market environment now stable enough such that if there were M&A opportunities that presented themselves, you'd be ready to capitalize on that?

Well, I think we're very happy. And we believe that the capacity we got coming online, breaking up pre-COVID levels, and then expanding our capacity beyond including the expansion of Bangladesh. We can continue to do that organically with all the opportunities that we do have. And that's part of our Back to Basics strategy is now focusing on maximizing our capacity utilizing it. And we have like capacity that's available between the repurchasing of our Mexican capacity as well as the Bangladeshi capacity coming online, which is only phase 1, we also have a phase 2. So we know we've got enough in front of us, we think, to continue driving sales. And that's why we're focusing on our price and our availability in our market share.

Thank you.

And your final question comes from online with UBS.

Hi, good morning, and thanks for taking my questions. I want to ask if you could provide a little bit more insight on how the end users behave throughout the quarter. I mean, particularly very interested to see how you're seeing someone like the corporate or and also like the social events, you see, how do you see that evolving maybe next year? And how much would you expect that to come back?

Well, right now, the good news is that the end users still getting our products through different opportunities. In other words, mass retail, online selling, they're making up, I think of that tourism and travel. So the question is going to be, it’s all function of the pandemic, when social gatherings commence again, and then we'll see the traditional business come back. So I can't really answer that question. I don't know when that will happen. But the good news is that, despite all these events not occurring, we're very encouraged with our POS, almost coming back to normalization. And that's a function of us taking share, as well as the market recovering and finding ways to bring product to the end user. So that’s probably the answer to that question.

Okay, understood. And just one quick follow up, you were also mentioning that probably sales might rebound next year to around 80%, 85%. Pre-COVID? So how should we think about the SG&A because I mean you have implemented the Back to Basics strategy. So just wondering how much of the SG&A should we see that bounce back next year, assuming there's a more normalized environment?

We will see volume driven distribution costs, right, that will roll into our SG&A. But I mean, I think the way to think about SG&A more broadly, is that we're driving to this 12% target, right? We have two targets, our gross margin target, our SG&A target. And the 12% SG&A is something that we think that we're very close to we were below that this quarter, and we think we can run at that level or better as we move into ‘21.

Understood. Thank you very much and congratulations.

And there are no further questions at this time.

Okay. I'd like to thank everyone for joining us today. And we look forward to speaking to you very soon. Have a good day, and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. I now disconnect.