Earnings Call Transcript - GIL Q1 2020

Operator, Operator

Thank you for joining us for the Q1 2020 Gildan Activewear Earnings Conference Call. All participant lines are currently muted. After the presentation, we will have a question-and-answer session. I will now turn the call over to Sophie Argiriou. Please proceed.

Sophie Argiriou, Vice President, Investor Relations

Thank you, Demetria. Good afternoon, everyone, and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the first quarter of 2020. We also issued our interim shareholder report containing management’s discussion and analysis and 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 our business outlook, 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. And with that, I will turn the call over to Rhod. Rhod, go ahead.

Rhod Harries, Executive Vice President and CFO

Thank you, Sophie, and good afternoon to all, and thank you for joining the call. We hope everyone is staying safe and keeping as well as possible during this unprecedented time. Before we get to the results for the quarter, let’s start with an update on the COVID-19 related actions the company has taken since March 23 when we last spoke with you. From the outset, as the whole situation developed, our first priority has been and remains the health and welfare of our employees, customers, suppliers, and other partners as we ensure the continuity of our business. In this regard, we are very pleased that our production of face masks and isolation gowns is now underway. We are currently selling masks in some of our facilities in Central America to support local government requirements, as well as on behalf of a cooperative consortium of North American apparel and textile companies supplying non-medical masks to the healthcare sector. We are also producing non-medical masks and isolation gowns for various retailers to be distributed to healthcare organizations. In total, we have current plans to produce over 150 million masks and gowns under this effort, and we will continue to provide as much supply of product as we can as we move through the pandemic. To support production of masks and gowns, we have limited manufacturing activity currently underway, operating with stringent safety processes and protocols in place. Far and away, the majority of our manufacturing capacity around the world remains idle after we extended the shutdown of our operations following mid-April to respective government directives and to manage our inventory levels, given the significant downturn in demand caused by the pandemic. Our distribution centers, which have strong inventory levels, mostly remain open to serve customers with appropriate safety measures in place for our employees, but at much reduced operating levels. In parallel with its reduced operating activity, we have moved quickly and decisively to control all costs for non-critical capital investments and to manage our working capital. In this regard, on March 30, we implemented a number of workforce measures. The Gildan Board of Directors, Glenn, myself, and the rest of the executive team agreed to forego 50% of our salaries, and we have implemented pay reductions ranging from 20% to 35% across all senior management levels. Further, much of our salaried workforce is now operating on a four-day workweek. Finally, given the uncertain duration of this crisis and the related economic impacts, we have moved forward with major additional actions to strengthen our balance sheet and liquidity position. In our March update, we indicated that after drawing down the remaining available portion of our revolving long-term bank credit facility, we stood with just over $500 million in cash and over $50 million in available credit lines. On April 6, we secured an additional $400 million in long-term debt, providing us with liquidity of over $950 million, and we are currently operating with just over $650 million in cash on hand and $300 million in available credit lines. Further, in addition to suspending our share repurchases, which we did in early March, today, we announced that we will be suspending our quarterly dividend starting with the first quarter. While returning capital to shareholders is a key priority for Gildan, and we remain fully committed to doing so when the environment normalizes, we have taken these actions to ensure that we are extremely well positioned to navigate through this evolving, challenging, and highly uncertain environment. Now, moving on to our first quarter results, we generated $459 million in sales, down 26.4% compared to the prior year quarter, mainly due to lower sales volumes. Although our initial expectations called for lower volumes in the first quarter, the overall volume declines in the quarter were meaningfully higher than we anticipated given significantly weaker demand in March. During the first two months of the quarter, our sales performance in North America for imprintables was relatively on track but fell off considerably in March, typically the biggest sales month in the first quarter as the spread of the pandemic started to heighten in North America. Our retail sales were also impacted, although less severely in the mass and online channels. Overall, these year-over-year volume declines in the quarter were partly offset by a positive product mix and slightly higher net selling prices due to lower discounting. Activewear sales of approximately $373 million fell 24.5% during the quarter, driven in imprintables by double-digit unit volume declines in both North America and internationally, as well as due to a $6 million sales return allowance related to our SKU rationalization initiative. In retail, activewear sales were down due to store closures and lower demand caused by the pandemic, although the decline was less severe than we saw in imprintables. In the hosiery and underwear category, we generated $86.5 million in sales in the first quarter, down 34% compared to last quarter, as the downturn in demand related to store closures drove lower sales. In addition, as we highlighted in February when we reported our 2019 first quarter results, the decline in hosiery this quarter also reflected the impact from the exit of a stock program and the year-over-year impact of the initial rollout of a new private brand sock program, which launched in the first quarter last year. In underwear, overall sales were down due to the current challenging demand environment and the year-over-year impact of fully exiting a branded underwear program at the end of the first quarter of 2019, partly offset by increased sales of private brand men’s underwear in the mass channel. Gross margin in the first quarter was 23.2%, and adjusted gross margin was 24.6% after excluding an $8 million charge related to discontinued imprintable SKUs. Although adjusted gross margin was down 120 basis points compared to the first quarter of 2019, it is important to highlight that the year-over-year variance included 340 basis points of negative variance related to manufacturing idling and other COVID-19 related costs. Without these costs, adjusted gross margin would have been 28%, representing a 220 basis point increase from the prior year level. Accordingly, COVID-19 costs more than offset favorable product mix related to our underwear business, lower raw material costs, and most notably, the benefit of an improving cost structure from manufacturing optimization issues under our back-to-basic strategy. Moving to SG&A expenses, for the first quarter, SG&A expenses totaled $74 million, down $19 million over last year, primarily resulting from reductions in compensation expenses, lower volume-driven distribution expenses, and tightly managing all our costs, including eliminating all discretionary expenses as we move through the back part of the quarter. Now, let me highlight certain impairment charges taken in the quarter in light of the impact of the COVID-19 situation. During the first quarter, although we did not incur any significant customer-specific accounts receivable write-offs, we increased our allowance for expected credit losses to reflect heightened credit risk in this environment. As you would expect, some of our customers are working to navigate through this challenging period and have requested extended payment terms on their account balances as they closely manage their operations and working capital positions. While we are working with these customers and fully expect payment, we are nonetheless required to assign an element of risk to these receivables and adjust our allowance for credit losses accordingly. In addition, this quarter, we have recorded an impairment charge of $94 million related to goodwill and intangible assets acquired in previous sock and hosiery business acquisitions after conducting an impairment review of our hosiery cash-generating unit. While our long-term outlook for this part of our business remains unchanged, and we believe that we are well positioned from a competitor perspective, the impairment was triggered by the broad impact of COVID-19 on market valuations, including for Gildan. Finally, in the first quarter, we recorded $10 million of anticipated restructuring and acquisition-related costs largely associated with the relocation of our Mexican operations and costs related to the completion of the exit of our shifted apiece activities. Adding up all these elements, our operating loss in the quarter totaled $92 million compared to operating income of $33 million in the prior year. Before reflecting charges associated with restructuring and acquisition-related costs, the goodwill and intangible asset impairment, and discontinued imprintable SKUs, we generated adjusted operating income of $20 million in the quarter compared to $43 million in 2019. Our net loss for the quarter was $0.50 per share, while adjusted EPS was $0.06, down from $0.16 last year, reflecting the sales and operating margin decline, including $0.08 of manufacturing idling and COVID-19 related costs. Turning to free cash flow, we consumed $235 million of free cash flow in the first quarter of 2020 compared to $128 million consumed last year for this period. The change was mainly due to the decrease in earnings in the quarter and higher working capital from increased finished goods inventory due to a planned inventory build in the first part of the quarter. Our capital expenditures in the first quarter were approximately $26 million, primarily for textile and yarn operations. We expect lower levels of capital spending going forward as we defer non-clinical capital expenditures in the near term. Finally, under our 2019 share repurchase program, we bought back just over 843,000 shares in the first two months of 2020 for a total cost of $23.2 million. At quarter end, we had net debt of just over $1.1 billion and a net debt leverage ratio of 2.2x trailing 12 months adjusted EBITDA. Now, a few words on the outlook. Visibility regarding the duration and extent of the impact of the pandemic remains extremely low. And as you are already aware, on March 23, we withdrew our quarterly and annual guidance. However, to provide further context, we thought it would be helpful to update you on the demand trends we have seen thus far in April. In the imprintables channel, when we last spoke in the third week of March, POS was down approximately 50% and we expected further weakness. This trend played out at the end of March and in April, we have seen POS trending down 75% compared to prior year levels. Turning to our international imprintables channels, POS in Europe is tracking at similar levels to North America, while Asia is slightly better with POS down 65% from last year’s levels. POS in retail channels has also decelerated in April as more and more retailers closed their doors in response to shelter-in-place and non-essential business closure directives. Overall, POS in the retail channel is down 45% in April. In this regard, our branded and licensed sock business and our global lifestyle private brand business have experienced weaker levels of POS given our high exposure to the apartment, sporting, and specialty store channels, as well as large sporting-related events. On the other hand, we are very encouraged by the strong performance of our private brand underwear business in mass stores and our e-commerce sales, particularly as online retailers are starting to include our basic apparel product categories as priority shipments along with essentials. At this juncture, it is unclear how these trends will evolve as different actions are enacted in various jurisdictions to adjust to the ongoing phases of the pandemic. However, given what we have seen thus far in April and given broader economic expectations, we do expect a significant decline in POS and shipments for the second quarter of 2020. Accordingly, this sales outlook, combined with the impact of fixed cost absorption, while our manufacturing facilities remain idle, will likely lead to a significant earnings loss in the second quarter of 2020. In closing, despite this outlook, the actions we have taken position Gildan well to navigate through this challenging environment. As I highlighted earlier, our primary focus is the health and well-being of our people and the continuity and long-term success of the business. We are very proud of how our organization has adapted to deal with the current environment, including responding to help alleviate global PPE shortages. We have taken steps to reduce our fixed costs and expect to continue to lower our expenses as we move forward and adjust to a weak demand outlook, which could extend through the remainder of the year. We have good inventory levels in all product categories to service our customers and we have strong liquidity overall. Furthermore, our back-to-basic strategy, which we have been implementing over the last two years to simplify and lower our cost structure, has put us in a better position to deal with these events. We have successfully navigated through challenging environments in the past and we are confident that our strong business model, financial position, and resilience will allow us to emerge successfully from this global crisis, positioned well for the long term. With that, thank you, and I will turn the call back over to Sophie.

Sophie Argiriou, Vice President, Investor Relations

Thank you, Rhod. That concludes our formal remarks. 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 will now turn the call back over to the operator for the question-and-answer session. Demetria, go ahead.

Operator, Operator

Thank you. Our first question comes from Paul Lejuez of Citi Research. You may proceed.

Paul Lejuez, Analyst

I am curious about your expectations for cash burn in Q2 relative to Q1, just given that you have had more time to make adjustments to inventory and CapEx as well as SG&A. And then I just want to circle back on the financial health of your largest customers on the printwear side; what are the conversations that you are having with those folks? What sort of terms are you extending and what are they communicating to you about future orders? Thanks.

Glenn Chamandy, President and CEO

Rhod, do you want to deal with this?

Rhod Harries, Executive Vice President and CFO

Yes, I will. Okay, thanks, Paul, for the question. So on cash burn, when we spoke to you in mid-March, we said that we would expect to get our cash burn down to the $35 million to $40 million range as we moved through or the end of April and into May. I can say that we are very much on track for that. So as we move through the first part of the second quarter, our cash burn will be at that level, $35 million to $40 million. We have done a lot. We have implemented a lot of actions as we went through with the opening remarks of the call. All of that is allowing us to effectively drive our cash burn to where we expected it would be. If you look at the financial health of our customers, our customers are obviously, like everybody else, working through the overall situation. They have taken actions to effectively manage their overall operating positions to ensure that they can service their customers while adjusting their cost structures to deal with the reduced level of demand that we are seeing across the various states, particularly in the states where you have shelter-in-place mandates. I would say all of our customers are operating; in some cases, they may have reduced some of their warehouses to reduce cost, but they are adjusting to the demand footprint that is out there. They are selling down out of their inventory, and as demand arises, they may come to us and effectively source supply from us as required in order to support the sales, but obviously given the inventory that was in the channel and the level of sales that we are seeing, our shipments are very low now because distributor inventory is, for the most part, taken care of demand.

Paul Lejuez, Analyst

Understood. Thank you very much. Good luck.

Rhod Harries, Executive Vice President and CFO

Thank you.

Operator, Operator

And our next question comes from Brian Morrison with TD Securities. You may proceed.

Brian Morrison, Analyst

I have to believe in this environment that several competitors must be much more negatively impacted than yourself. I am curious how you view the landscape from an ability to gain market share perspective and maybe even the potential for M&A despite your cash conservation as it is ongoing right now?

Glenn Chamandy, President and CEO

Well, look, it’s hard to say how our competitors will weather the storm. I think what’s important is – we are still in the early days right now, because there is really not a lot of business activity happening as we speak. As we move towards the end of this year, I think we will see a lot of materialization happen in terms of how the market will shape out and the competitive landscape and how people are able to bring their capacity back on, etcetera. There is definitely going to be a shake-up in the industry in the sense that things are changing. The question is also going to be how long will it take to get demand back to the levels that it was before. So, I think what we are doing is putting ourselves in a pretty good position to weather the storm with the additional liquidity that we have both from a go-forward position on an organic basis, as well as we have liquidity in the event of lower opportunistic acquisitions available to us as the market unfolds.

Brian Morrison, Analyst

Okay. And then Rhod, one quick one just in terms of your prior cost-saving initiatives to get to your 30 and 12. I realized that those are not achievable at this point in time, but in terms of facility consolidation, specifically in Mexico, also maybe Canada and Honduras; are the facility consolidations complete, are they on pause, what do they stand right now?

Rhod Harries, Executive Vice President and CFO

Well, all the facilities in Mexico have now fully been closed down, and we are moving equipment basically at the end of Q4 and during Q1 with the moving equipment throughout our system. There were some operations still being performed in Mexico that were completely discontinued towards the middle of March, and then the balance of the equipment will be repurposed as we go forward. Regarding our expectations on both SG&A and margin, nothing has changed in our business. We are continuing to execute our back-to-basic strategy from all aspects. Truthfully, this is going to make us even better and stronger because we are able to expedite and manage our SG&A. We are planning on making sure that we continue to focus on SG&A as a percentage of sales. We don’t anticipate that as we go forward into 2021, we will be fully recovered. We think we will be moving forward in the right direction. So we are going to make sure that our SG&A is right-sized as we move into 2021, and all the things that we are doing in terms of leveraging our core compass in our back-to-basic strategy and manufacturing, we will continue to improve our margins as we go forward.

Brian Morrison, Analyst

Thank you.

Operator, Operator

And our next question comes from Heather Balsky with Bank of America. You may proceed.

Heather Balsky, Analyst

Both tied to recoveries, there will be eventual recovery. I guess, first, when we do get there, can you help us think through how manufacturing ramps up? How does that process work to ramp up your facilities as demand comes in, or do you have to ramp up the full facility? What are other factors we should be thinking about? And then the second question is just to follow up on your customers. This situation is very different than the shelter-in-place period, but I am curious what you saw back in ‘08/09 and maybe what we can glean from that for this time around? Thanks.

Glenn Chamandy, President and CEO

Okay. Well, I will start off with the ‘08/09 because it’s easier to answer, to be honest with you. In a certain sense, 2008/2009 wasn’t a customer demand issue; it was very short-lived in terms of the negative POS. It was a banking crisis; it wasn’t consumer confidence capabilities. Consumers were still going to sporting events and traveling. So there was a short-term financial impact that drove through the system, but it didn’t affect the consumer. Here, we really have consumer social distancing as the major driver where gatherings, jog runs, schools, camps—almost every single event that we potentially sell product to are affected. I think as these social distancing requirements change and things open up, people going to the beach, stores are opening up, we will have a gradual increase. It will be a more gradual increase versus what we saw in the past because until the sports events and rock concerts and everything else come back, it will take some time. As far as our ramp-up is concerned, our number one focus is to ensure that we first utilize all of our existing inventory. What our plan is to ramp up our plants is to probably do it at a stagnated basis, bringing on capacity as we need it and somewhat drawing down our inventory. We ended Q1 with just under $1.2 billion of inventory. We want to see that number come down and generate some cash flow from that during the course of this year to improve our liquidity situation and put us in a better position as we enter 2021.

Heather Balsky, Analyst

Great. Thank you so much.

Operator, Operator

And our next question comes from Luke Hannon with Canaccord Genuity. You may proceed.

Luke Hannon, Analyst

Thank you so much. Actually, I wanted to follow up on that last point of inventory. Glenn, you mentioned you had $1.2 billion as of the end of the quarter and I guess that’s going to be enough to satisfy demand across all channels, but I am curious about the fashion basics part of it. Is that subject to any sort of seasonality and do you envision being able to get promotional to move some of that inventory out?

Glenn Chamandy, President and CEO

Well, look, I mean, the fashion basics are a ring-spun T-shirt, so it’s really—not as products for fashion basics basically the word basics and everything we make is pretty basic and doesn’t really have a lifespan as long as they are in our catalog. So, there is no need to liquidate inventory because it’s going to go obsolete. Definitely, I would say that we are in a position now where we will see how the market perceives as it goes out. But our inventory is in good shape. At the end of the day, we are going to leverage our competitive advantage to make sure that we continue to drive our sales and drive market share as we exit this whole event as we move and most of the doors open up, and products start selling. We have an advantage because we are a low-cost producer, and we will leverage whatever we need to do to continue to take advantage of the opportunity and sell and drive market share as we go forward.

Luke Hannon, Analyst

Okay, understood. And then the second one for me, as far as Bangladesh goes, I know that the CapEx being spent is just sort of laying the foundation for the facility there. Do you envision— I think it was late 2021—is when you expect your production from that facility? Is that still the same timeframe that you are thinking, or is there a chance of any slippage there?

Glenn Chamandy, President and CEO

Well, our objective was to really support sales for 2022. So, it was going to come on at the end of ‘21 to support ‘22. We are in the process, nearly—we are going to reduce our capital investments. The good news is, like I mentioned in the last call, we are sort of at a stage where we are doing foundational work at the facility. So, over the next couple of months, it’s just a few million of capital to be spent. We will put in the foundation, avoid the rainy season, and then the option of timing of the plant will be on our side depending on what kind of capital we want to spend and what the market conditions are as we go forward. I mean things are changing so fast. I mean, already we are starting to see—we just opened up recently and we are starting to see POS is picking up a little bit more positively than some of our assumptions. So if the markets open up quicker and things get better, then we will look at it one way, and if things go the other way and there is a relapse and things get closed down, we will have to evaluate our options in terms of how we manage our entire manufacturing supply chain.

Luke Hannon, Analyst

Okay, appreciate the color.

Operator, Operator

And our next question comes from Sabahat Khan with RBC Capital Markets. You may proceed.

Sabahat Khan, Analyst

Thanks, and good afternoon. Just want to get, I guess, obviously, the visibility is very low on the demand side and just on the broader market, but just want to understand what kind of scenario you contemplated when you decided to suspend the dividend? What do you sort of expect capital over the next few quarters in terms of cash usage? And then you also took out some additional debt, just want to understand what kind of decreases you might be planning for. Are we thinking you would lose half of your sales this year or potentially more? What’s the ballpark range of that?

Glenn Chamandy, President and CEO

Rhod, you want to take this one please?

Rhod Harries, Executive Vice President and CFO

Yes, so when we look at the various scenarios on a go-forward basis, it is really hard to have good visibility on how things are going to unfold as we move forward through Q2 and into Q3 and Q4. Obviously, we have the facts from what we are seeing in April, and we have projected that information forward ultimately to try and get a sense of what the year would look like. Now, we don’t know whether it’s going to be a V or a U recovery or exactly how it’s going to play out, but I think what we need to do is plan for the worst and hope for the best. So I think as we look forward, we have contemplated effectively what our cash burn is when we have our manufacturing idled. As we said earlier, we have cash burn of $35 million to $40 million a month. We have projected that effectively moving forward if sales stay down, then we will consume that cash and we will have to manage our overall receivables in a way that makes sense to minimize outflows. We also need to get ready for the ramp-back, but we don’t really know exactly how long that will take and what it looks like. I think we have made sure that we have effectively solidified our overall financial flexibility and balance sheet. We have lots of capabilities to weather the storm and be very well positioned as we come out of this. I would say, again, obviously, we suspended guidance, and it is very difficult to give you a view, but you can just effectively gauge for yourself how we are set up that we are making sure that we are prepared for scenarios that are negative as we continue to move forward.

Sabahat Khan, Analyst

Okay, thanks. And then just a follow-up on that; in terms of cash availability and liquidity and so forth, if sales continued to deteriorate at these levels for a few more months, the balance sheet could get stressed. Have you been having discussions with your syndicate regarding covenant flexibility and so forth? Or is that something you expect to deal with later, just on the back of the dividend cuts to get an idea of where those discussions might be?

Rhod Harries, Executive Vice President and CFO

Look, if you look at where we are effectively with respect to our covenants, I mean, we are in compliance with our covenants currently and we expect our covenants to be manageable as we go forward, given the actions that we have taken and everything that’s underway. Again, that gives us lots of flexibility, but we will continue to monitor the situation as we go forward. We will see how it unfolds. I would say again, we don’t have a crystal ball; we don’t know how it’s going to play out. If we do get into a very, very negative situation where we do have to have discussions regarding our covenants, we definitely think we would be able to attain the flexibility that we need going forward. But right now, we don’t see that, and so I would say we are very comfortable with how things stand as we currently sit here today.

Sabahat Khan, Analyst

Great. Thank you for the color.

Operator, Operator

And our next question comes from Vishal Shreedhar with National Bank. You may proceed.

Vishal Shreedhar, Analyst

Hi, thanks for taking my questions. Regarding the shutdown, obviously, you had applied some fairly large programs with fairly significant retailers. Just wondering if they are understanding or appreciative of the situation you are in, and maybe you are unable to meet shipping commitments like you have in the past? Is there potential for some increased charges from them, because you can’t reach your commitments that you had adhered to in the past, or is it just that everyone understands the different scenario?

Glenn Chamandy, President and CEO

Well, we have enough inventory to support demand with our major retail customers. So we are in a very good inventory position, which is something that we built up going into the season because of the anticipated high growth of sales, particularly with our big large mass retailer. We feel pretty comfortable. Sales haven’t fully met our expectations, and so we have a really good inventory position. We have a lot of product that we need to bring to market. I mean we don’t think it will be an obstacle for us to get to market to continue supporting even as we go into the second quarter and beginning of the third quarter. That’s not an issue for us right now.

Vishal Shreedhar, Analyst

Okay, that’s helpful. Thank you. And on the sock and hosiery business—I know this current macro period is probably not the best one to reflect on the business—but even looking over the last few years, the business really hasn’t performed as well as some might have anticipated it. I am just wondering how you are going to think of that sock and hosiery business? Is it still core for you guys, or is this discussion for a different day? Should we still think of building out that retail product portfolio and expand into adjacent categories?

Glenn Chamandy, President and CEO

Well, again, I think it’s still a significant part. I mean, before this whole situation, we sort of anticipated that our sock business was plateauing; that’s what we guided to in the beginning of the year. Unfortunately, half of our sock business is mass, while the other half is somewhat compared to the department of specialty stores between our GoPro brand and our Under Armour license, etcetera. Those stores are just closed; that’s really what was part of the issue here, and we have lost POS because of that, which, therefore, was the byproduct of the write-down. It’s not that that business has really gone away; the prime reason is that the stores are not able to function. We feel very comfortable with our sock business as it is. I think we have a pretty good base of programs today. As we said in our guidance, it is stable and will come back because those are programs that I think will continue to resonate with customers as we move forward. We are going to continue to focus on socks, underwear, and activewear products within our back-to-basic strategy, both with our existing brands and also to leverage our private label opportunity with our customers. We are excited about the opportunity to continue growing the business. This situation negatively impacts sales and POS, but on the flip side, I believe there is going to be significant shifts in sourcing in the future. Our buyers are transitioning to each source product. From a private label perspective, we have a lot of opportunities to leverage our low-cost manufacturing in this hemisphere as things change. To me, 40% of global apparel is made in China. We don’t see that materializing in the future. There are many opportunities for us to grow our business and to focus on our back-to-basic strategy while emphasizing the big shifts from retail into private label; I think all three categories will be pro categories as we go forward.

Vishal Shreedhar, Analyst

Thanks.

Operator, Operator

And our next question comes from David Swartz with Morningstar. You may proceed.

David Swartz, Analyst

Thanks for taking my questions. So in the socks and hosiery segment, specifically—of course, these store closures have impacted that greatly—but at the stores that are still open, can you talk about what the POS trends have been compared to a baseline for what you had expected this time of the year?

Glenn Chamandy, President and CEO

Well, the POS trends were doing really well up until the third week of March. As essentials became such a big push, both mass and online retailers basically stopped receiving product and focused on the other essentials while everything else just fell off. We have seen a slight tick back up to normal levels in POS in those markets today, and I think we are tracking at pretty much on plan and where we are now in April. We are picking back up again as retailers started bringing products back in and replenishing their shelves.

David Swartz, Analyst

Now, as manufacturing someday starts up again and you get back to normal production levels, can you talk about how the lower commodity prices may benefit the business?

Glenn Chamandy, President and CEO

Prices are down, but not significantly. Cotton, our largest commodity, has decreased by $0.10 a pound since the crisis began. While deflation could affect us along with oil prices, I believe this is all temporary. There's potential for increased capacity as companies have inventory that hasn’t been sold, but we must consider how to implement social distancing in factories. This could limit our production capabilities for a while. We are aware of the challenges with raw materials, but we are prepared to resume capacity once we are able to reopen. Overall, we are in a solid position with good inventory, a low-cost model, and a plan to safely restart our operations while managing social distancing. We need to bring back our 54,000 employees, including 5,000 sewing operators, to work.

David Swartz, Analyst

Thanks, and good luck in this difficult time.

Glenn Chamandy, President and CEO

Thank you.

Operator, Operator

And our next question comes from Stephen MacLeod with BMO Capital Markets. You may proceed.

Stephen MacLeod, Analyst

You gave some good color around the gross profit impact in the quarter of gross margin impact of 340 basis points. Is there any way—like is any of that just related to the initial shock of the manufacturing shutdown, or is that something we would expect to accelerate as you enter potentially Q2 into Q3?

Rhod Harries, Executive Vice President and CFO

If you look at the impact, the 340 basis points were driven largely by labor and manufacturing shutdown, also referred to as period costs. There were some contact costs associated with that; there were some other costs that were driven by the COVID-19 situation. As we move forward, we will see those costs unfold. Don’t forget that we started to shut down in March; we had two weeks of shutdown and as we move into April and May, we will incur those full monthly costs. That’s all wrapped into the $35 million to $40 million of cash burn as our facilities remain idle, even if you look at overall where we have cash costs on top of that, we have depreciation, and that’s effectively impacting as we have around $30 million of depreciation expenses. All in all, our total costs are around $50 million a month while our operations are idle.

Stephen MacLeod, Analyst

Okay, that’s really helpful. Thank you. And then just the question, maybe forward-looking and possibly too soon to answer, as you see things begin to recover in the imprintable space down the road, whether it is three to six months or whatever the timeframe is? Do you see the possibility for any change in mix? Do you think that customers and consumers, having their balance sheets damaged, may shift back to basics as you see a recovery taking all the imprintable space?

Glenn Chamandy, President and CEO

No, I think the space is well balanced. I would say that the opportunity typically in certain markets is price elasticity. Pricing is a little bit aggressive; you can create demand from promotional products and other avenues. Instead of merchandising something on a pen, you do it with a T-shirt, and there are all kinds of gimmicks that people could use which typically have been more of a basic category. I don’t see a big shift. I think the shift still is a continued preference for fashion products, and those are still growing in the market. That may change as we move forward, but I don’t see that big change. If you look at our POS from a negative perspective, it is largely aligned across the board.

Stephen MacLeod, Analyst

Okay, that’s it for me. Thank you very much. I commend you on your services in the healthcare sector while your manufacturing plants are down. Thank you.

Operator, Operator

And our last question comes from Chris Lee with Desjardins. You may proceed.

Chris Lee, Analyst

Good afternoon. Did I hear you correctly that the POS in certain parts of your imprintable business is a little bit less negative than your internal expectations?

Glenn Chamandy, President and CEO

No, what I said was that the last couple of days, 2 or 3 days, it was better than our expectations. I wouldn’t hold you back on that one, sorry. But we have been tracking negative at 75%, and with the last couple of days, it has improved somewhat. We don’t know if that’s because markets are opening up. When people start taking place again, we will see POS improve. The quicker the easing of social distancing, the more POS will pick up. We have taken a conservative approach, because of how we see things looking into Q2, pretty much as we have seen in April. If things get better, it will be great news for us.

Chris Lee, Analyst

Okay. I wanted to check in China; I think last time you had kind of a data point showing that it was down 75% in February and down 35% in March. Can you give us an update on how that market is performing?

Glenn Chamandy, President and CEO

We are still down around 50%, so it has not regained as quickly as anticipated. Even though the markets are opened up, it’s still not business as usual there. They are more strict there, and social distancing is still a significant factor. People haven’t resumed regular activities, including in restaurants or retail. So it hasn’t bounced back as quickly as expected, but I think it is a different environment compared to the maturity of the North American market.

Chris Lee, Analyst

Okay, that’s great. And then maybe just a quick one for Rhod. I just want to confirm what you said earlier from our modeling perspective, looking at the income statement for Q2. Did I hear you correctly that if I am looking at my cost of goods sales and SG&A expenses, all in is running above $50 million per month, so about $150 million for the quarter?

Rhod Harries, Executive Vice President and CFO

That is I would say a fair estimate. If you look at again what our cost structure is and where we are, we will try and improve upon that as we go forward, but that’s what I said, and that’s what you should think about as far as the base drag we see while we have everything idled, feeding sales out of inventory.

Chris Lee, Analyst

Okay, great, and thanks to everyone. Thank you.

Rhod Harries, Executive Vice President and CFO

Thank you.

Operator, Operator

Hello, ladies and gentlemen. This concludes our Q&A portion for today’s conference. I would now like to turn the call back over to Sophie Argiriou for closing remarks.

Sophie Argiriou, Vice President, Investor Relations

Okay. Thanks, Demetria. Before ending the conference call today, I would like to remind you that we will be holding our Annual Shareholders Meeting tomorrow morning at 10:00 a.m. Eastern Time, and it is going to be in virtual format. So with that, I would like to thank everyone for joining us again today, and we look forward to speaking to you very soon. Have a good evening. Goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.