Earnings Call
Gildan Activewear Inc. (GIL)
Earnings Call Transcript - GIL Q4 2023
Operator, Operator
Good morning. My name is Jeanie and I will be your conference operator today. I would like to welcome you to the Q4 2023 Gildan Activewear Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Jessy Hayem, Vice President, Head of Investor Relations. You may begin your conference.
Jessy Hayem, Vice President, Head of Investor Relations
Thank you, Jeanie. Good morning, everyone. Earlier we issued a press release announcing our results for the fourth quarter and full-year 2023 as well as our first-time guidance for 2024. The company's management discussion and analysis and consolidated financial statements are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today and will also be available on our corporate website. Joining me on the call today are Vince Tyra, President and CEO of Gildan; Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing and Distribution. This morning, we'll take you through the results for the quarter, and a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which 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. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Vince.
Vince Tyra, President and CEO
Thank you, Jessy. Good morning everyone, and welcome. I've been looking forward to engaging with you all, and I'm thrilled to address you today in my first earnings call as the newly appointed CEO of Gildan Activewear. As for the results, we delivered a solid Q4, thanks to the outstanding operational execution by our highly skilled team of employees across our global footprint. In fact, 2023 was a year of strong progress on Gildan's sustainable growth strategy, despite an overall challenging macroeconomic backdrop and tough year-over-year comparative periods. This foundation, together with a solid balance sheet puts us in an enviable position to enhance it as we go forward. In my early weeks with the company, I witnessed firsthand the incredible talent and dedication of the Gildan team. I've been a participant in this industry for several decades as an operating executive and in other capacities, and Gildan's powerful manufacturing engine is truly a key differentiator. I look forward to leveraging Gildan's strengths, our incredible team, and my experience to drive this organization's long-term growth and create value for shareholders. I'm working closely with the leadership team and the Board to find opportunities to further leverage our strong foundation and drive strong and durable growth in the future. Finally, as I've been onboarding with our great company, I've had the opportunity to visit with 100 employees in Montreal and Honduras and have recently met with many of our key customers during the recent Industry Trade Shows in Las Vegas, Nevada and Long Beach, California, which is fueling my excitement for the future. It was great to reconnect with many familiar faces in the industry as well and gain their perspective on our company and the industry. I'm personally looking forward to sharing my views with you in the months ahead as we leverage our strong capabilities and innovation to create further opportunities going forward. I look forward to taking your questions a little later during the Q&A session. And with that, I will turn it over to Rhod.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Thank you, Vince. Good morning to all, and thank you for joining us today. I'd like to start the call by thanking the entire Gildan team for everyone's excellent work and dedication through 2023 that led us to a strong finish to the year. We delivered sales growth of 9% in the fourth quarter, adjusted operating margin at the high end of the company's target range, double-digit EPS growth, and we generated robust cash flow, allowing us to execute on our capital allocation priorities. We are now two years into the Gildan Sustainable Growth Strategy or GSG Strategy, and we are pleased with the progress made across our three key strategic pillars but are also excited to capitalize and further enhance all of the work that has been done in 2023 as we enter 2024. I will expand on this shortly along with our outlook for 2024, but for now let's shift our focus to the fourth quarter results. Net sales for the fourth quarter came in at $783 million, up 9% with activewear sales at $644 million, up 8%, and hosiery and underwear sales at $139 million, up 11%. The increase in activewear sales was fueled by higher volumes driven by point-of-sale as well as higher levels of customer replenishment than the prior year. We specifically benefited from healthy point-of-sale levels and continued strong performance in key growth categories such as fleece and ring spun T-shirts, which translated into a favorable mix versus last year. Finally, our international sales were down 24% in the quarter despite some point-of-sale recovery as difficult macroeconomic conditions in these markets led to a lack of inventory replenishment compared to the prior year. Turning to the hosiery and underwear category, the sales increase was fueled by higher volumes driven by a combination of point-of-sale with pockets of strength notably in global lifestyle brands as well as the continued rollout of programs in the mass retail channel. So despite continued industry weak demand for men's underwear and socks, we continue to achieve a solid performance in this category. Wrapping up on sales, overall we are very pleased with the performance that we delivered in the quarter in the context of what continues to be an uncertain environment for consumer spending as we move from 2023 to 2024. Turning to the margins for the quarter, adjusted gross margin came in at 30.2%, up 110 basis points year-over-year, primarily due to lower raw material costs slightly offset by lower net selling prices. As fully expected, we saw a sequential improvement of 270 basis points in our adjusted gross margin as pressure from the flow through of peak cotton costs subsided significantly in the fourth quarter. As we previously called out, this will continue to be a tailwind as we move through 2024. Moving on to SG&A, expenses were $88 million or 11.3% of sales, including CEO separation costs and related advisory fees on shareholder matters. On an adjusted basis, as a percentage of sales, SG&A was up 30 basis points to 10.5% as the impact of higher year-over-year expenses more than offset the benefit of sales leverage. Looking at our overall SG&A performance in 2023, we continue to be pleased with how the team managed SG&A in this inflationary environment, and we expect this performance to continue as we move forward. So summing up these elements in the quarter, we generated an operating margin of 22.8% of sales. Now as part of annual impairment testing requirements and given improved profitability projections related to our hosiery sales, we recorded a $41 million reversal of prior hosiery-related impairment charges. Adjusting for this as well as for restructuring costs in both years and an insurance accounting gain in 2022, we generated an adjusted operating margin of 19.7%, up 90 basis points over last year at the high end of our target range of 18% to 20% and in line with our expectations. Further, after reflecting net financial expenses of $21 million and factoring in continued share repurchases, we reported GAAP diluted EPS and adjusted diluted EPS of $0.89 and $0.75 respectively. Turning to cash flow and balance sheet items, cash flow from operating activities totaled $239 million with free cash flow coming in at $203 million driven by higher adjusted net earnings together with lower working capital investments and lower capital expenditures. The strong finish yielded full-year cash flow from operating activities of $547 million and free cash flow of $392 million. The significant increase in free cash flow in 2023, which, albeit came in a little lower than previously anticipated, reflected lower capital expenditures as well as lower working capital investments versus the prior year when we were working higher to bring inventories to higher and more optimal levels during the pandemic. The progressive ramp-up of our new large-scale Bangladesh facility is underway, which will continue through 2024, and as planned, we exited 2023 at a capacity run rate of around 25% and continue to expect an exit rate of about 75% at the end of 2024. Finally, and importantly, we ended the year with very satisfactory inventory levels and in a strong position to service our customers as we move through 2024. Moving on to our NCIB, our robust buyback activity this quarter underscores our strong cash flow generation and commitment to delivering value to our shareholders. In fact, in 2023, we repurchased approximately 11.5 million shares under our NCIB program, or close to 7% of our public float, returning a total of $492 million of capital to shareholders for the year including dividend payments. Given the strength of our free cash flow, even with the significant return of capital during 2023, our net debt finished at $993 million at year-end with a net debt leverage ratio of 1.5, well within our 1x to 2x targeted debt levels. This brings me to a few thoughts on our GSG strategy and our outlook for the year ahead. We've made strong progress on our three key strategic pillars: optimizing our capacity, fostering innovation, and implementing our next-generation ESG strategy. We've also successfully executed on several components of the financial framework we laid out. While our revenue growth during 2023 was hindered by an industry-wide soft demand environment driven by the challenging macroeconomic backdrop, we have nonetheless continued to drive market share gains in key product categories, and this positions us well as we move forward leveraging our strong capabilities in the target markets that we serve. For 2024, we expect the following: revenue growth for the full-year to be flat to up low single-digits; adjusted operating margins slightly above the high end of our 18% to 20% annual target range; CapEx to come in at approximately 5% of sales; adjusted diluted EPS in the range of $2.92 to $3.07, up significantly between 13.5% and 19.5% year-over-year; and free cash flow above 2023 levels driven by increased profitability, lower working capital investments, and lower capital expenditures than in 2023. Further, the outlook that I just laid out is underpinned by some key assumptions including the following: our outlook assumes that point-of-sale trends continue to improve compared to 2023, reflecting potential for recovery in various markets, as well as overall growth opportunities. Our sock license agreement with Under Armour is expiring late March, which is expected to have a minimal impact on our profitability. Excluding the impact of this agreement and on a comparable basis, our outlook implies full-year revenue growth in 2024 would be more in the low to mid-single-digit range. We also assume continued share repurchases in 2024, further demonstrating our belief in the strength of our business and our commitment to optimizing capital allocation, and we expect to maintain our debt leverage ratio within our target range of 1x to 2x. Finally, as discussed last quarter, the timing of the potential enactment of legislation related to Global Minimum Tax or GMT in Canada remains uncertain. We have nonetheless incorporated into our guidance the estimated impact of the implementation of draft GMT in Canada and Barbados retroactive to January 1, 2024, as well as certain expected refundable tax credits which will reduce our SG&A. I also want to provide you with an update on the current quarter. While we expect positive point-of-sale trends across the board in 2024, point-of-sale has been somewhat mixed so far in Q1 with good strength in certain important activewear areas such as in fleece and ring spun products, but with more variability in other areas such as with underwear in the hosiery and underwear category. Moreover, and more importantly with respect to Q1, we expect the higher levels of customer replenishment that we saw in Q4 will impact the level of restocking that will take place in Q1. As such, we currently expect Q1 net sales to be down low single-digits and expect Q1 adjusted operating margin to come in around the low end of our 18% to 20% target range. In conclusion, I'd like to leave you with a few thoughts. Following the multi-year volatility related to the pandemic, we saw normalizing inventory and replenishment patterns as we move through 2023. But it was a challenging year overall given the impact of the macroeconomic environment, and we are pleased with the progress we achieved. As we begin 2024, we feel that Gildan is well positioned to continue to win in our markets regardless of the macroeconomic backdrop. While we expect continued momentum in the imprintables market, end-user behavior continues to be affected by inflationary pressures weighing on buying patterns, still leading some of our customers to place orders closer to their needs and managing their inventory and replenishment levels more tightly. That said, we expect demand for replenishment-type products to continue to normalize as we move through the year given the nature of the products we sell. Our in-stock levels are in great shape, and we have significant flexibility in our manufacturing system and a healthy balance sheet. We also remain encouraged by market share gains in key growth categories such as fleece and ring spun and are incredibly excited about our recent product innovation. As introduced at the Impressions Trade Show in January 2024, these products feature softer fabric and enhanced printability based on our new proprietary soft cotton technology, which is expected to further enhance our competitive positioning. Consequently, you can see we're continuing to leverage the GSG strategy to drive organic growth and remain confident in our ability to drive shareholder value into the future. We thank you for your interest and support in our company. This concludes my formal remarks. And with that, I'll turn back over to Jessy.
Jessy Hayem, Vice President, Head of Investor Relations
Thank you, Rhod. Before moving to the Q&A session, I'd ask you to limit the number of questions to two, and we'll circle back for a second round of questions if time permits. Finally, please note that the purpose of today's call is to discuss Gildan's results for the fourth quarter and year ended December 31, 2023; we will only address questions relating to our financial results and guidance and related operational matters. Jeanie, you may begin the Q&A session.
Operator, Operator
Your first question comes from the line of Paul Lejuez with Citigroup. Your line is open.
Paul Lejuez, Analyst
Hey, thanks guys. Just a couple quick ones. On the GMT, I’m curious what tax rate you guys are assuming and also the assumed SG&A offset that you got built into guidance? And then can you also talk about the pricing environment? You mentioned lower cost, but also lower pricing. So what are you seeing from the competitive landscape? Do you expect those decreases to last all year on the pricing side? And any sense of magnitude that you can share and how it might differ by category? Thanks.
Vince Tyra, President and CEO
Okay, Paul. I'll start and I'll turn it over to the team to answer the question on pricing. But if you look at effectively what we've assumed with on the tax side, as I indicated in the comments, we've assumed the enactment of the global minimum tax and that will occur retroactive to January 1, 2024. Currently, there's draft legislation out there. It hasn't been enacted yet, but it's our expectation that it will be enacted in Canada this year. So what we've assumed from a tax perspective is that in parallel with the enactment of GMT, our effective tax rate will move up to just below 18%. That will be the consequence of GMT rolling through Canada and other jurisdictions. However, there are other benefits that we expect to see related to tax reform that are expected to yield credits that will flow through our SG&A line. The simplest way to think about that is that the quantum of those credits will probably reduce our SG&A as a percent of sales by about 80 basis points. So that effectively will bring down the net impact of GMT on our P&L and will also boost our operating margin. So that is reflected in our EPS guidance. If we move to the question on pricing and what we've assumed in the price environment, effectively, if you look at prices overall, we do see stability as we move into 2024. We've seen it in '23, and we do see it as we move into '24. There are pockets where we do see real competitiveness in pricing, I would say. If you think about our national accounts business there, it's very competitive. If you look at the international markets as well, we've seen some price pressure there, although we do see that abating as we move into '24. And partly because from our perspective, we're going to be very strong on the product side. But overall, we are expecting a stable price environment with a little bit of, I would say, downward pressure on net price, but very manageable as we move through 2024.
Paul Lejuez, Analyst
Thank you. Good luck.
Vince Tyra, President and CEO
Thank you.
Operator, Operator
Your next question comes from the line of Jay Sole with UBS. Your line is open.
Jay Sole, Analyst
Great. Thank you so much. I have two questions. First for Vince, as you've gotten acclimated in the company, what do you see as the biggest long-term growth opportunities? Just from a sort of big picture qualitative perspective? And then secondly for Rhod, well, if you think about the fiscal '24 margin guidance, how are you thinking about gross margin versus SG&A within that guide? Thank you.
Vince Tyra, President and CEO
Thank you, Jay. This is Vince. Yes, I mean, obviously, that's a great question. I think that's getting developed. I can talk about my initial impressions in the first month or so here. But in terms of nailing down the long-term strategy, I think that will come as 2024 develops. Certainly, my experience with the industry is helping, hopefully, shortcut that time frame. But with that being said, I mean, I think the reasons I'm here, or what I've been able to validate in terms of what we have and the manufacturing capacity and the agility of that capacity is noteworthy. The brands that we have when you think about American Apparel, Comfort Colors, and Gildan itself are powerful in this industry, and we're reenergizing the American Apparel brand as most know. The leadership team has a number of things that go into it, but I think we'll be focusing on what our capabilities are in manufacturing while also looking at how we can enhance these aspects further, including the GSG strategy, which I think has been pretty strong. The back-to-basics approach that I've observed and what's transpired in the last couple of years has led to the GSG and our trajectory internationally, which I think will avail us some promising opportunities. The biggest surprise I noted during my week in Honduras was just how much innovation is occurring inside the plant and what that provides us in terms of long-term opportunities.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Okay. Thanks, Vince. If I go to the second part of your question, Jay, on gross margin, SG&A, and maybe I'll also talk about it from an operating margin perspective. But look, we think we're in very good shape as we move into '24. If you look from a gross margin perspective, where we were in Q4, our gross margin came in just a little above 30%, and that was in line with what we had anticipated. We have been saying all through '23 that effectively we expect to see the tailwind associated with fiber costs really kick in as we get into Q4, and as we move into 2024. You may recall that caused pressure in the early part of '23. We did not price for that, and we knew it was effectively going to flow through. We are seeing that in Q4, and you can expect our gross margins to stay strong as we move through '24. We'll continue to improve upon that because there are other steps we're taking from a manufacturing perspective. We continue to optimize our structure. We have Bangladesh ramping up, which we're incredibly excited about. We believe that we have gross margins well under control as we move into '24. Likewise, from an SG&A perspective, we are very disciplined with SG&A. We've been focused on ensuring that the front end of our business operates efficiently. If you look at our SG&A performance for the full-year in '23, we came in just around 10%, which is around our target. As we move into '24, we'll look to maintain those levels, maybe improve upon it slightly, and we'll also benefit from the refundable tax credits flowing through. Therefore, you can expect SG&A for the full-year to look good on a comparative basis versus '23. Overall, our operating margin expectations are why we're projecting it to be slightly above the 18% to 20% range since we anticipate solid gross margins and manageable SG&A. We are well-positioned, and we are excited about what lies ahead for 2024.
Jay Sole, Analyst
Got it. Thank you so much.
Operator, Operator
Your next question comes from the line of George Doumet with Scotiabank. Your line is open.
George Doumet, Analyst
Good morning, everyone. Rhod, could you clarify the factors influencing the Q1 guidance of a decline in the low single digits? How should we view the potential recovery towards a flat or low single-digit performance? Will that recovery be gradual or a bit more uneven?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
No. If you look at Q1, we have called out that it would be down low-single digits. I mentioned in the script, right? We talked about point-of-sale being mixed. The story behind point-of-sale is that it’s in good shape for us across the activewear category. If that category is the most critical for us, we can see POS performing reasonably well given the macro backdrop. We are comfortable with what we're observing there, although there are some pockets of weakness where it's a bit more variable. As we go into Q1, we expect restocking on the distributor side. We are moving into the season, so we expect restocking. But because of the strength in Q4, where we would normally anticipate destocking, we saw shipments in line with POS in Q4. This prevented the normal destocking in Q4, and as a result, we expect lower levels of replenishment in Q1. Thus, the impact of that led us to anticipate a weaker start for the year, but we do see strength as we move into Q2, Q3, and Q4 based on our strong competitive positioning, market share gains, and key categories such as ring spun, fleece, and various product drivers. There are many elements driving the business as we consider our outlook for '24. So we've got strong product categories, product innovation, and the rollouts of new styles in national accounts. In international markets, we have new retail programs. We are very encouraged by our performance in the hosiery sector with some key customers. Overall, despite macro challenges, we believe we are positioned extremely well. You'll begin to see that become clearer as we progress through the year.
George Doumet, Analyst
Okay. Thanks. And just for my follow-up, I also want to talk a little bit more about free cash flow. Can you maybe quantify the lift, or can you give us some goalposts in terms of working capital and CapEx for this year? Thanks.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Yes. For CapEx, as I mentioned, 5% of sales is a good benchmark. If you've seen CapEx slightly higher in '23, this was attributed to additional spending on Bangladesh, but as we ramp up operations in Bangladesh, CapEx is expected to decrease as we move into '24. Regarding working capital, we have made our investment in working capital. Therefore, as we move into '24, we won't need to make the substantial investments we had in previous years. This strategy should lead to strong free cash flow for 2024 and exceeding levels from '23, given the different factors impacting profitability, working capital, and CapEx.
George Doumet, Analyst
Okay. Will you carry me through a number for working capital, just to get a sense of where you see that landing at the end of the year?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Well, if you consider working capital, at the end of the year, we're generally running in the mid-30s as a percentage of sales. That's effectively where we tend to be. So, around that area is what I'll be focusing on, George, as you think about developing working capital models. Again, working capital is managed like all other areas of our business, and we believe we've kept it well under control. Our inventory position is very healthy, ensuring product availability. So mid-30s is kind of how I would think about working capital for us when we finish '24.
George Doumet, Analyst
Great. Thanks. Good luck.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Thank you.
Operator, Operator
Your next question comes from the line of Brian Morrison with TD Securities. Your line is open.
Brian Morrison, Analyst
Hey, good morning. Rhod, can you just elaborate on some of the industry details on the Q4 POS performance, maybe an update on inventory in the distributor channel, and then the trend to trade down to lower price points, is that accelerating or staying constant?
Chuck Ward, President, Sales, Marketing and Distribution
Okay, Brian. Good morning. As we looked at Q4, we continue to see growth in the areas we've been discussing with ring spun and fleece being up double digits. We saw good positive point-of-sale from the basics as well, with growth in the low-single digits. We saw growth across the categories throughout the fourth quarter, and we're observing that carrying into Q1 with positive point-of-sale as well. Therefore, we continue to gain share and outperform the market in those categories despite the ongoing challenges in the market. From a channel inventory standpoint, I think it's well-managed and healthy, especially as we enter the season later this quarter. So I would characterize the channel inventory as being in good shape.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Regarding trade down, we did see some trading down as we progressed through Q4. However, the trade down isn’t evolving in the same way we've discussed previously. The SKU category we like to focus on is fleece, and the mix between hoods and crews has shifted to a more balanced ratio compared to what we've traditionally seen, which was more heavily weighted toward hoods. So the trade down trend did unfold as we moved through the fourth quarter. Overall, I would assess our mix positively, and as we approach '24, we've been strategic with our outlook.
Brian Morrison, Analyst
Okay. Thanks for that, Rhod and Chuck. I want to follow up with my second question, which is for Vince. I want to circle back to your creation of long-term shareholder value in your prepared remarks. Again, it's early days. It sounds like you're content with GSG, but high level, what are your initial thoughts on growth drivers or avenues as we look beyond the execution of the near-term GSG strategy? You mentioned international and the cost advantage, but does anything stand out that requires a material shift from the current strategy?
Vince Tyra, President and CEO
No. I think I'm quick to answer that. I don't see a material shift in our Gildan sustainable growth strategy. I think it's pretty well-defined. We’re focused on leveraging manufacturing capacities, especially with our Bangladesh investment that will strengthen our presence in Europe and internationally, creating opportunities as we execute. I don't see any major changes that we need to implement, but rather we need to enhance what we’ve established.
Luke Hannan, Analyst
Thanks. Good morning. I wanted to ask about product innovation, which has been mentioned multiple times on this call, particularly regarding the new products that were introduced last month. Can you give us an estimate of the potential sales impact or even the percentage of SKUs? Additionally, where else do you envision opportunities for innovation within the portfolio?
Chuck Ward, President, Sales, Marketing and Distribution
Hi, Luke. Thank you for the question. As we consider innovation, we think across not only product but also our manufacturing and ESG practices. We are continually focusing on avenues for innovation in our offerings. At the show, we were excited about the innovations we've introduced centered around our core basics. We specifically made enhancements to our Style 2000, 5000, 8000, and fleece products, aimed at improving features and printability. The marketplace has responded well, and you’ll start seeing that new product line hitting the market in mid-year. We believe these innovations reinforce our core offerings, particularly within the fleece segment, where we have witnessed significant growth, and this is expected to continue.
Luke Hannan, Analyst
Understood. Thanks. For my follow-up, I wanted to ask about how both retailers and distributors are positioned today regarding inventory levels. How do they compare to pre-pandemic levels, possibly in terms of supply weeks or other metrics? I understand it was mentioned that everyone seems to be ordering closer to their needs, but is the overall sentiment that they can manage with less inventory?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
If you consider where we are regarding inventory with our customers, I would say we are at stabilized levels. Over the last few years, we've been focused on rebuilding our inventory to bring our customers back to normalized levels. Thus, I feel that, across the board, inventory is in good shape. Having sufficient inventory is vital for effective product sales, which has driven strong growth in fleece and ring spun categories. On the retail side, if you recall '22, we experienced some destocking, which has eased but remains tighter as we move into '24; retailers are managing inventory carefully to stay well-positioned given the current macro environment. So while we are seeing normalized levels in printwear, inventory, you might observe a tighter environment on the retail side where they might not be replenishing to POS levels but maintaining lower levels.
Mark Petrie, Analyst
Hey, good morning. Thanks. Vince, given your background both with brands and distributors, can you discuss your views on Gildan's positioning as a brand portfolio? Do you see any gaps or opportunities? You mentioned American Apparel specifically; I hope you could expand on that as well as the broader topic.
Vince Tyra, President and CEO
Yes. The Gildan brand is even stronger than when I left the industry. The market share is enviable, as I mentioned previously, so I think that dynamic is robust. In terms of what we have with brand growth, I believe Chuck hinted at the ring spun and fleece segments, where we see considerable potential. However, looking specifically at American Apparel and Comfort Colors, I have memories of buying from Barry Chouinard years ago, and I see the brand's merchandising at trade shows now is terrific. Behind the scenes, innovation is occurring in water use and how we wash garments has improved. As I mentioned, we could see some enhancements in our marketing strategies. That said, I don’t want to imply that significant SG&A shifts are planned as part of this brand development. The heritage of the brand maintains strong connections with customers, just as it did in the early 90s to the early 2000s, and that relationship has grown even stronger over time. Hence, while there are opportunities within the Gildan brand, our focus on colorways should continue to invigorate American Apparel and maintain Comfort Colors' established presence in resort and college wear.
Chuck Ward, President, Sales, Marketing and Distribution
Mark, to provide some clarity, we have launched programs across 2023 that are contributing to our results, and we have encompassed new retail initiatives in both activewear and underwear programs that contribute to our 2024 guidance. As we stated previously, we're seeing positive contributions from our global lifestyle brand partners and recovery opportunities. So, our portfolio includes new programs and recovery aspects across each channel.
Mark Petrie, Analyst
Okay, thanks. And to follow up, Chuck, aside from the sock replacement program, which is noteworthy due to the UA program, are the programs in general already structured and integrated into the plans for the fiscal year?
Chuck Ward, President, Sales, Marketing and Distribution
Yes, they're structured and integrated into the plan already. We are not seeking them out; they are locked in place. As we phase out manufacturing of some of the UA products, we are filling in that capacity with other margin-enhancing products.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
And Mark, in many respects, we see that as a positive shift since we can utilize our capacity more efficiently. Our programs with the global lifestyle brands are performing well, gaining market share as we transition away from the license with Under Armour. The complexity and cost associated with that license were substantial, but now we can focus on more productive uses of our resources and align our offerings more closely with our core strengths.
Operator, Operator
Your next question comes from the line of Christopher Li with Desjardins. Your line is open.
Christopher Li, Analyst
Hi, good morning, everyone. I have a two-part question on capital allocation. First, you mentioned robust free cash flow and leveraging is solidly expected for this year. In terms of your share buyback, Rhod, do you anticipate investing about the same amount in share buyback this year as in the previous year?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Yes. If you look at our share buyback strategy, we feel strongly positioned to continue with our buybacks into '24. I want to highlight the recent dividend increase as well, as it's the third consecutive year we have managed to raise our dividend by 10%. When we consider capital allocation aimed at returning value to shareholders, both share buyback and dividends are key areas of focus. Last year, we repurchased approximately 7% of our shares. We have a baseline target for about 5% for shares repurchases. Given our strong balance sheet and free cash flow capabilities, I would not be surprised if we can do a bit more than that throughout the year.
Christopher Li, Analyst
Okay, that’s helpful. Additionally, regarding M&A, I apologize if you covered this already, but could you share your perspective on M&A as it relates to capital allocation?
Vince Tyra, President and CEO
Yes, and this is Vince. The company has had a historical tendency to pursue acquisitions, particularly between 2013 to '17. However, at this juncture, our capital plan is primarily focused on organic development. In relation to M&A, I don’t see that as a priority this year. Our allocation strategies will emphasize operations in Bangladesh, innovation, and growing organically instead of inorganic growth.
Operator, Operator
Your next question comes from the line of Martin Landry with Stifel. Your line is open.
Martin Landry, Analyst
Hi, good morning, guys. I would like to delve into the Q1 guidance. You indicate margins coming in at the lower end of your 18% to 20% range for Q1. However, you also mention cotton as a tailwind for 2024. Can you help reconcile these two factors and clarify why your operating margins are set to be softer at the beginning of the year?
Vince Tyra, President and CEO
Yes. Thanks, Martin. If you consider Q1, the primary reason for the softer margins is due to it being a smaller quarter. If you contrast Q1 with Q2, Q3, and Q4, our gross margins are actually in good condition based on observations we made in Q4. Our SG&A tends to be relatively consistent quarter-to-quarter, primarily due to distribution costs; thus, Q1 usually shows slightly higher SG&A costs, reflecting previous year's patterns in the 11% to 11.5% of sales. Therefore, we anticipate seeing Q1 at a margin near the lower end of that spectrum. However, we are optimistic regarding our operating margin for the full year, as we expect to move solidly into the higher range in subsequent quarters.
Martin Landry, Analyst
Okay. I had also noticed that cotton prices have spiked a bit recently, and I’m curious how much you've covered for your needs in 2024?
Vince Tyra, President and CEO
Yes, cotton prices have indeed seen slight increases recently. It's interesting to see how the cotton market behaves, similar to many commodities, as inflation persists. However, we possess solid visibility into our cotton position. We addressed this previously, and our outlook on our cost of goods sold for '24 remains strong. Our pricing aligns well with our cost structure, and we’ll monitor any potential influences cotton prices have on market prices as we progress.
Vishal Shreedhar, Analyst
Hi. I was wondering about volume growth in 2024. Should we consider it in line with sales? If not, what are the variables to consider? Additionally, as Bangladesh ramps up, can we expect the volume growth to accelerate throughout the year and into 2025?
Vince Tyra, President and CEO
Yes. Looking at volume growth throughout '24, we clearly anticipate increases. Early indications suggest volume growth will likely surpass sales growth slightly in order to support these targets. We are exercising caution regarding our sales mix and have assumed price stability; however, some areas may remain competitive. Therefore, our expectations for volume growth remain optimistic and should improve as we progress into 2024. While Q1 will require attention due to its lower replenishment levels after a strong Q4, we expect Q2, Q3, and Q4 to perform better. Volume growth remains a critical driver for our long-term growth. As you asked regarding operating margin targets, the incorporation of tax credits in SG&A might lead us to rethink how we set our operating margin targets post-2024. It’s essential to understand the operating margin has been a metric for assessing our return on invested capital and overall efficiency. We're currently comfortable with 18% to 20%, but we’ll evaluate this continuously as strategies evolve and progress unfolds into '25.
Operator, Operator
Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is open.
Stephen MacLeod, Analyst
Hi, good morning. Thanks. Can you provide more insight on how Gildan's brand portfolio is positioned? Are there gaps or opportunities? Vincent, how do you view American Apparel and your role as a portfolio?
Vince Tyra, President and CEO
Yes. Gildan's brand strength has significantly improved since my previous tenure, revealing an enviable market share. I believe Chuck has accurately identified areas such as fleece and ring spun that showcase growth potential. Specifically, when discussing American Apparel and Comfort Colors, I've fond memories of engaging with Barry Chouinard and can now appreciate how well the merchandise is displayed at trade shows. The innovations surrounding water usage and garment washing are evident in our initiatives. While we aim to enhance marketing approaches, I assure you we don't have major shifts in mind for SG&A. Our historical brand equity continues to resonate well with distributors, reinforcing our identity as we develop American Apparel and maintain Comfort Colors in leisure and campus fashion.
Operator, Operator
This concludes today's call. You may now disconnect.