Earnings Call Transcript - GIL Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Gildan Activewear Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Sophie Argiriou. Thank you. Please go ahead.

Sophie Argiriou, Senior Vice President

Thank you, Paulie. Good morning to everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year of 2020. The Company's management's discussion and analysis and consolidated financial statements are expected to be filed with Canadian securities and regulatory authorities and the U.S. Securities Commission tomorrow, Friday, the 26th of February, and will be available on our website. With me on the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Rod will be providing commentary on our results for the quarter. After which, a Q&A session will follow. Today's conference call includes certain statements that 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 that 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. And with that, I will turn the call over to Rod.

Rhodri Harries, Executive Vice President and CFO

Thank you, Sophie. Good morning, everyone. Thank you for joining us on our fourth quarter call. And as always, we hope everyone is staying healthy and safe. We are pleased to end 2020 with a strong finish despite the ongoing pandemic and having to successfully navigate through unexpected weather-related headwinds in the quarter. And we are extremely proud of our teams who throughout the year have delivered exceptional operational execution. From the beginning of the pandemic, we acted swiftly, putting our people first while maintaining a strong focus on our key priorities. We took the necessary business decisions and actions to strengthen our competitive positioning for the long term and accelerated our efforts under our Back to Basics strategy. The work we have done this year gives us great confidence that we are entering 2021 as fundamentally a stronger company. Our fourth quarter performance showed a strong sequential recovery from the previous quarter and compared to last year. We grew sales by 5%, increased adjusted operating margin by 120 basis points, delivered adjusted EPS growth of 10%, generated record free cash flow of $278 million, and concluded the year with a strong liquidity position of approximately $1.6 billion. We also continue to push forward with our Back to Basics strategy during the quarter with further focus on rationalizing our product portfolio. Specifically, in line with what we previously communicated we were planning to do when we reported our third quarter results, during the fourth quarter, we conducted a detailed strategic review of our retail product offering and took the decision to rationalize part of our SKU base, which resulted in an inventory charge in the quarter of $26 million. At the same time, we also took a small charge of $6 million associated with the discontinuance of PPE SKUs. With the streamlining of our product portfolio, including an approximate 60% reduction of our printable SKU base, which we announced previously and now a 70% reduction in our retail SKUs, we are confident that the resulting benefits of eliminating redundancy and complexity in our product offering will drive efficiencies in manufacturing and distribution. This, in turn, will lower costs, improve inventory productivity, enhance service and product availability, and drive more profitable growth—all key objectives of our Back to Basics strategy. So overall, we are pleased with what we have achieved in the quarter, particularly given the circumstances of having to deal with unexpected weather-related events. As many of you heard in the news in November, two back-to-back hurricanes severely impacted countries across Central America, forcing us to suspend production temporarily at our Rio Nance complex and other locations in Honduras and Nicaragua. Facilities at certain locations remained closed for most of November and part of December as we dealt with the impact of the hurricanes before starting to reopen and ramp production back up in December. Our manufacturing team has done an incredible job both by stepping in to provide much-needed humanitarian aid to those impacted by the hurricanes and at the same time bringing back our operations. As we manage through this disruption, we continue to service our customers during the fourth quarter from existing inventories, production from other regions, and products manufactured early in the quarter in Central America. Now moving on to the details of our fourth quarter results. We generated net sales of $690 million, up 4.8% from last year. Sales of activewear totaled $538 million, up 11.3% compared to the prior year quarter. The increase in activewear sales was largely due to higher overall unit sales volumes and a strong imprintables product mix which more than offset lower net selling prices of imprintables. The nonrecurrence of distributor destocking that occurred in the fourth quarter in 2019 helped drive an increase in unit sales from imprintable sold in North America, which was partly offset by lower POS on a year-over-year basis due to the COVID-related demand environment, which also affected international markets. Although imprintables POS in North America was down compared to last year, we were pleased to see that sell-through trends improved sequentially. You may recall that POS was down year-over-year 15% to 20% on average during the third quarter of 2020. In the fourth quarter, imprintables POS fared better, down on average just under 10% compared to last year. Activewear products sold in retail, particularly through online and other channels, were also up over last year. Overall, hosiery and underwear sales in the quarter totaled $152 million, down 13% over the prior year quarter. Strong sell-through of our underwear products continued with sales up 20% in the quarter, significantly outpacing industry demand as we continue to grow sales of private label and our own branded offering products, even where we have seen weakness in retail sales within the hosiery category. This category has been more heavily impacted by the current pandemic environment, particularly within national chains, department stores, and sports specialty stores. Now on the margin performance, we are pleased to see strong recovery in gross margin compared to the third quarter this year and more importantly, improvement compared to last year. Before reflecting charges related to our retail SKU rationalization initiative and the small PPE write-down, which I addressed earlier, together with the reversal of a net insurance gain related to the hurricanes of $9.6 million in the quarter, our adjusted gross margin totaled 25.8%, 330 basis points better than the previous quarter, and 20 basis points above our gross margin of 25.6% last year. On a sequential basis, the gross margin improvement was largely a reflection of the strong mix we had in the quarter as we had anticipated. Stronger mix also drove year-over-year margin improvement, together with the impact of lower raw material costs and the flow-through of manufacturing efficiencies from our Back to Basics strategy. These positive factors more than offset the impacts of lower average net selling prices as we continue to push forward with our imprintables pricing strategy, as well as COVID-related and other period costs in the quarter. Benefits from our Back to Basics strategy also helped drive down SG&A costs in the quarter. SG&A expenses totaled $71.9 million or 10.4% of sales, and were down 6% compared to $76.5 million or 11.6% of sales in the prior year quarter. Adding up all these elements, we generated operating income of $78.8 million in the quarter, up from $24.3 million last year. On an adjusted basis, operating income came in at $105.7 million, reflecting an operating margin of 15.3%, up from 14.1% in the fourth quarter of 2019. Financial expenses of $13.1 million in the fourth quarter were slightly higher than last year, due primarily to fees associated with amendments to our debt facilities made earlier in the year and the impact of foreign exchange. After deducting financial expenses, we reported net earnings of $67.4 million or $0.34 per diluted share. On an adjusted basis, net earnings totaled $90 million or $0.45 per diluted share, up 9.8% over last year as a result of the higher sales and stronger operating margin performance. Turning to free cash flow and the balance sheet. As I mentioned earlier in my remarks, free cash flow of $278 million in the quarter reflected better performance, bringing cumulative free cash flow for the year to $358 million. While we did reduce capital expenditures this year, the free cash flow generation has largely been driven by reductions in working capital as we adjusted inventory levels through the pandemic and in response to our Back to Basics initiatives. During the fourth quarter, we also saw inventory levels reflect reduced production related to the hurricanes. On inventories, overall, we ended 2020 with inventory levels of $728 million, down 23% from the third quarter and down 31% from approximately $1.1 billion at the end of 2019. While we will build some of this inventory back in the first quarter, we do expect to run at lower overall average inventory levels going forward than we have historically, given the benefits from our Back to Basics strategy. Given our free cash flow, we reduced our net debt position during the quarter to $577 million, down from $862 million a year ago. Consequently, we ended the year with available liquidity close to $1.6 billion, providing us with strong flexibility as we start 2021. Our debt leverage ratio was 3.5x adjusted EBITDA. However, for debt covenant purposes, our leverage ratio was 1.3x. Given this positioning, let me take a moment to address our capital return programs. We remain committed to returning capital to shareholders through our dividend and share repurchase programs over the long term. And while we are currently well positioned from a liquidity perspective, before resuming capital return to shareholders, the Company's priority remains to position its external net debt leverage ratio within its historical target range of 1 to 2x. Once we achieve this level and also have good visibility on how the pandemic is evolving, we expect that our Board will review capital return policies. Looking forward, while we're encouraged by the recovery we have seen in our business, I'm pleased with our competitive positioning in light of the progress we've made with our Back to Basics strategy; we remain cautious with our expectations for 2021, given the ongoing impact of COVID-19 and continuing restrictions on social gatherings. Further, while our supply chain is stable and ramping back from the fourth quarter hurricane impacts, the risk of COVID-19 disruption remains for all companies. All these factors contribute to an uncertain outlook. Consequently, we are not providing detailed guidance for 2021. However, we can provide some commentary on our expectations based on what we are seeing so far in the market. Imprintables POS in the U.S. and internationally currently is running slightly weaker during the first quarter compared to what we saw in the fourth quarter and is overall down about 10% to 15% compared to 2019 levels. We believe this deterioration from the fourth quarter run rate is the result of second wave lockdowns in various geographies as well as weather-related impacts in the U.S. over the last couple of weeks, and we would hope to see improvement as we move forward. In retail, we continue to see higher activewear and underwear sales compared to 2020. However, sales in the soft category continue to be down year-over-year. Accordingly, while overall we expect to see sales improve from 2020 levels, as I said earlier, we remain cautious with our outlook. On a stronger note, we do believe the progress we have made driving our Back to Basics strategy will continue to strengthen our financial and operating flexibility and support our margins as we continue to drive towards our long-term targets. Now before I comment on cash flow, a small point on our adjusted measures. I just want to remind you that as we continue to assess the full impact of the hurricanes on our business and operations, we do expect to recognize additional recoveries in 2021. Consistent with the treatment of the net insurance gain in the fourth quarter, these future insurance recoveries, net of related costs and charges will be excluded from our adjusted financial measures. Finally, on cash flow, we are planning on resuming gross capital expenditures in 2021 for our major capacity expansion project in Bangladesh. We continue to remain excited about the benefits this next phase of expansion will bring for our business. Overall, we are projecting total capital expenditures for 2021 to run in the range of 4% of sales. After reflecting this level of capital expenditures, our goal is to generate positive free cash flow for the year. So in closing, we do expect a better environment with the ongoing rollout of the vaccines in 2021 than we saw last year and are hopeful that we will start to see a more normalized environment emerging as we move through the year into 2022. However, regardless of how this plays out, we do believe the actions that we have taken in 2020 with respect to our Back to Basics strategy are strengthening and reinforcing our competitive position. Fundamentally, we believe this will ultimately allow us to take advantage of growth opportunities in principles, retail, and international markets while at the same time driving profitability as we deliver long-term value for our shareholders. Thank you. And with that, I will turn it back over to Sophie.

Sophie Argiriou, Senior Vice President

Thank you, Rhod. That concludes our formal remarks, and we'll be starting the Q&A session. I'll now turn the call over to the operator for the question-and-answer session. Paulie?

Operator, Operator

Your question comes from the line of Brian Morrison with TD Securities.

Brian Morrison, Analyst

Rhod or Glenn, can you just talk about where your manufacturing facilities stand right now with respect to the impact from the hurricanes? Is everything back online? Or then what capacity utilization rate do you plan on running maybe through Q1 or currently? And how should we think about period costs as a result going forward?

Glenn Chamandy, CEO

Well, the capacity side of the question. While we're continuing to ramp up, we're at a point where our current capacity right now is exceeding our POS requirements. We've gotten to the point where we've built the production up to surpass the ongoing current POS trend in the market. We're going to continue to produce at a higher rate than our POS through this quarter end. By Q2, we think we'll be fully caught up. That will also allow us to take advantage of any upside as we go into recovery into the market in the back half, if there is a recovery from the pandemic back to normalization. So I think we're in relatively good shape, and we'll be in a better position as we enter Q2. I think we'll have enough capacity as we look forward into the remainder of the year to capitalize on any material upside to improvements of the pandemic and social gatherings.

Rhodri Harries, Executive Vice President and CFO

And I just add on with respect to period costs, Brian, if you look at the capacity levels that we're currently running at, as Glenn said, we're running ahead of POS. We don't expect to see any real significant period costs out of, let's say, period absorption that we normally have seen as we've moved through the 2020 period. So period costs are pretty well behind us. Now we're rolling into our inventory and we don't expect to see any significant impacts as we move through Q1 and into Q2.

Brian Morrison, Analyst

Okay. And then just second question, if I can. With respect to the big run in commodity prices here, if I can just go back to sort of cotton 101. I know you're hedged out six to nine months. But are you able to put price increases or cost mitigation to offset this? Maybe just remind us the percentage of COGS that cost in your conversion costs make and the recent increases that have baked in your 18% long-term margin target guidance?

Glenn Chamandy, CEO

Well, I would say that for fiscal 2021, we're very comfortable with our cotton position. Historically, as cotton has gone up, we've been able to pass those cotton increases to our customers. So if cotton remains at these types of levels, we'll see pricing go up as we move into 2022. That's the way you should look at it. So we're optimistic, I believe, about our pricing cost.

Operator, Operator

Your next question comes from the line of Paul Lejuez with Citigroup.

Tracy Kogan, Analyst

It's Tracy, filling in for Paul. You guys mentioned the POS trends were trending somewhat below Q4. And I'm wondering if you could parse that out between the current period and fourth quarter by region. So what does that look like in the U.S. versus fourth quarter in Canada and in your other international markets?

Glenn Chamandy, CEO

Well, quarter-to-date, Rhod had mentioned in his commentary, we were down around 10% to 15%. That's pretty much across the board. The only thing I would add to that is that in the U.S., I think early in the quarter, we were running more similar to Q4, but the weather has been dramatically bad across the United States, which I think has put an impact on the POS. So I think in our U.S. market, I think it's more like Q4, but having weather impact and the rest of our markets are around that 10% to 15% range.

Tracy Kogan, Analyst

Got it. And then just a follow-up. What's your view of cotton aside, the current pricing environment in your key categories? What are you expecting in terms of pricing and promotions for this year?

Glenn Chamandy, CEO

Well, look, we're going to continue to leverage our Back to Basics strategy. We're going to continue to leverage our manufacturing cost savings. I mean if you look at our whole Back to Basics strategy, it's focused on growth, improving underperforming areas of our operations, leverage our costs, drive market share, increase margins, increase returns, and increase our return capital to shareholders. That's what a Back to Basics strategy is. So we have the luxury to continue being priced aggressively, which we will continue to do this year as we move through this year. Our pricing has been pretty stable. I would say once we launched our Back to Basics pricing strategy, we probably came back early in July, and we've been continuing pricing aggressively. That price is winning for us. We think we're getting share, and our business is performing very well. I think one thing that we had to also look at is that with the market even being down 10% to 15%, 70% of our total market in the United States or in the principal market is related to social gathering. So our market has evolved through e-commerce. We think that as we see this recovery, with our continued Back to Basics strategy, we're very optimistic as we move into 2021 and into 2022.

Operator, Operator

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

Vishal Shreedhar, Analyst

I was wondering in the quarter, if you could help us understand the impact on sales and gross margin rate of the mix shift.

Rhodri Harries, Executive Vice President and CFO

If you look at the mix in the quarter, the mix was strong, right, in Q4. Effectively, we were up 20 basis points year-on-year, but the mix impact was 190 basis points. So it was strong. As I said in my remarks, it was in line with what we expected. So if we look at where we were in the second quarter, the mix was a negative impact on margins of 600 basis points. In the third quarter, it was a negative impact of 280 basis points. As sales came back as we expected, effectively, we get the mix impact along with that. So mix turned positive for us in the third quarter. It was a bigger driver of our margin improvement. Back to Basics also was a big driver. Overall, we're very pleased with what we saw in the fourth quarter. Again, we expect that to continue as we move into 2021.

Vishal Shreedhar, Analyst

Okay. That's helpful. And into Q4, how much of a factor on mix was fleece? And should we expect the fleece seasonality to return back to normal in 2021?

Rhodri Harries, Executive Vice President and CFO

If you look at Q4, we did have good fleece sales. Fleece has been a good category through the pandemic, and it continues to be a good category. But overall, we did effectively see, I would say, broader mix that we were expecting, right? We talked about this in the past, as sales come back. We do see what we call fringe products effectively coming into the mix and driving margin. So fleece was good, strong category, continues to be very good, but also with other areas of our business as well driving that mix impact.

Glenn Chamandy, CEO

Once the fashion basic side of our business is also growing at a much faster clip today, which is also providing a mix improvement.

Vishal Shreedhar, Analyst

Okay. And just one last question. Regarding the Back to Basics strategy, the Company seems to be making good progress on that. How much of that strategy's benefits are we starting to see reflected in the P&L? Are there significant benefits still to come, or are we still in the early stages?

Rhodri Harries, Executive Vice President and CFO

Well, if you look at the strategy overall, again, I think we're particularly pleased if you look at Q4 and you look at the margin levels that we've been running at both from a gross margin perspective and an SG&A perspective. Effectively, we're back to operating margin levels above where we were actually in 2019 in that range, let's say, on lower sales. Effectively, the benefits of Back to Basics are really coming through, but they will continue to come through as we go forward, right? As effectively as sales continue to increase, all of the benefit from the reduction of the product portfolio, the SKU rationalization, and the impact that has on manufacturing and distribution, all of that will play through. This is a strategy that, as we've said many times, really takes the business back to effectively a business model that we know can generate strong sales, very good margin performance, and very good, I would say, capital utilization as we drive the business forward.

Operator, Operator

Your next question comes from the line of Stephen MacLeod with BMO Capital.

Stephen MacLeod, Analyst

I wanted to revisit a couple of points. You mentioned that the first quarter was slightly weaker. Are there any specific areas where you're noticing additional weakness, or is it fairly widespread when compared to the fourth quarter?

Glenn Chamandy, CEO

Well, no, it's across the board compared to Q4. I mean, honestly, I think it's somewhat weather related. I mean, see what's happening in Texas and the Northeast got hammered with back-to-back snowstorms. When people stop buying, they stop buying all together. So I would say it's across the board. But I would say, like I said earlier, I think that the market is more like a negative 10 in the U.S. and 10 to 15 range, and weather has driven down the U.S. market to the negative 10% to 15% range that we said before. So we're encouraged that it's improving.

Stephen MacLeod, Analyst

Okay. That's great. And then I just wanted to follow up on the cotton price inflation, which has been quite dramatic, and I understand that you historically had the ability to pass that through. But are you seeing any pricing movements on behalf of your competitors or any demand disruptions or order disruptions from some of your imprintables customers related to this price inflation that we've seen on cotton?

Glenn Chamandy, CEO

Well, we're the price leader in the industry, right? So we're going to continue to price aggressively. So people either match or give up market share, and we're going to continue to do that through the course of this year. We feel very comfortable with our product position. And as we move into next year, if cotton stays at these current levels, we'll see inflation and pricing going up. I think that's how we're going to play the year. We're well positioned and we're building up our capacity. What we're really looking forward to is the recovery in the back half of the year because we should have capacity to support additional growth as the recovery happens.

Operator, Operator

Okay. Your next question comes from the line of Jay Sole with UBS.

Jay Sole, Analyst

Glenn, could you talk a little bit about how the Back to Basics strategy is impacting what you're doing with American Apparel and also sort of relate that to your comment about pushing forward with your imprintables pricing strategy? Like what do you see in that brand? And what's the outlook for specifically when the ring-spun kind of fashion T-shirt market?

Glenn Chamandy, CEO

Well, the brand is going to be focused on really more our wholesale B2B type business. I think that's where we're taking the brand. It's going to be the fashion segment of our print work imprintable markets. We won't have some of the products being sold online that you can see on some of the big online retailers. But it's going to have a niche. It's going to be a little bit higher priced and a little bit different. So we have a two-brand strategy. We have Gildan, which is really the core breadth and American Apparel, which is step-up with a little bit of differentiation in product, fabrication, and the assembly of the garment. It's got a home within Gildan's band. It's doing good. Obviously, it's not as big as where Gildan is because we have a huge history of market share. We also have Comfort Colors, which is another brand that is basically again a little bit more unique as it's garment dyed. We have a good brand portfolio. We've narrowed down the SKU base of all of our brands so that we're really focused on what's going to sell, and we're comfortable that our portfolio is what we need today to continue driving our Back to Basics strategy. The Back to Basics strategy is making sure that we grow. The pillar of our strategy is growth. The second pillar is making sure that we peel out the underperforming parts of our business. Because how do you get margin expansion? It's not necessarily by having to raise prices or be more effective. It's also by taking the margin to lower profitability products you have in your line or complexity out, which ultimately increases the overall mix of your margin without doing anything. Couple that with driving at leveraging our better cost position because you have less capacity. That will drive share. We feel very comfortable that as we move forward, margins will continue to move up, returns will improve, our return on net assets will improve as we perform in terms of using less working capital, and ultimately, that will allow us to return more capital to our shareholders. So it's comprehensive. We've got a good plan. We've got the right product, and I think we're positioned well in the market.

Jay Sole, Analyst

Got it. Maybe, Rhod, if I could ask one more question. Just on SG&A dollars, like how are you thinking about budgeting the first quarter and for the rest of the year, just to help us with our models a little bit? I mean should we continue to expect the same kind of run rate of SG&A dollars that we saw in 4Q versus 2019 as we go in here into 2021?

Rhodri Harries, Executive Vice President and CFO

Yes. I mean, look, if you look at the first quarter of every year, generally, it's a little bit lower sales quarter. So our percent of sales generally goes up, right as far as from an SG&A perspective. But if you look at the dollar amount effectively on a quarter-over-quarter basis, I mean, we've done a great job on our SG&A, and we're going to stay focused on that as we go forward. We're working towards that 12% target overall. And that really is where we're trying to get to for a full-year basis. So if you look at our SG&A, I mean, as the environment normalizes, some costs are coming back into the system. You'll see that for all companies. If you look at employee-related costs or travel, things are coming back in. But we've done a very good job on our SG&A, we're going to keep it at those levels as we move forward as we drive towards that 12% target overall.

Operator, Operator

And your next question comes from the line of Chris Li with Desjardins.

Chris Li, Analyst

Glenn, just based on your comments about an expanded addressable imprintables market. Is it fair to assume that you do not necessarily need to see the traditional social gathering or corporate promotional end user segments to fully recover in order for your sales to be back at pre-COVID levels?

Glenn Chamandy, CEO

Well, look, we're down to 10% to 15%. So the answer is we definitely need some type of recovery of social gathering to take our sales back up to the normalized level. Otherwise, we'd probably be there today. So that would say, no, we did not have that recovery happen. But if you take the percentage of sales of the social gathering type products in our universe, it used to be 70% of our market. So people are buying products in different places, and they're buying them online. So there's been a little bit of shift; I didn't go to the local fair to buy my t-shirt. I'm going to go buy it online, but they bought their share. So it's not going to be a duplicative increase because social gatherings are starting to occur. The market will expand, I think we've had an efficient distribution system, in general, in the overall market. And time will tell to see what happens once the recovery takes place.

Chris Li, Analyst

Okay. That's helpful. And then at your last Investor Day, I seem to remember, and I could be wrong, that you mentioned that you had about 20% to 25% market share in the fashion basic segment, and there's a lot more room to grow. Do you have that number updated, given everything that's happened?

Glenn Chamandy, CEO

Well, it's growing. I mean I think we've definitely grown it significantly this year. I mean I haven't got the exact number to give you today, but I would say that we definitely have significant growth. I mean the two big areas of growth in our POS, our fleece and fashion basics, and that's what's really driving our unit volume growth. So we definitely are driving growth.

Operator, Operator

And your next question comes from the line of Luke Hannan with Canaccord Genuity.

Luke Hannan, Analyst

Rhod, I think you touched on in your prepared remarks that you guys are going to be free cash flow positive. You expect to be free cash flow positive for the year. And I know part of that is going to be running at sort of lower inventory levels just as a result of the Back to Basics strategy. But how should we be thinking about, I guess, your production schedule and how that's going to affect your inventory balance the course of the year? Is it going to be more normalized as in historical years where you're sort of building up that inventory balance in the first half of the year and sort of drawing it down in the back half? How should we be thinking about that?

Glenn Chamandy, CEO

I think that the inventory—look, we're tying on inventory now as we're catching up during the hurricane. Until we get to Q2, basically, we're just going to be in a catch-up mode on our business. As we get into the back half, like I said earlier, our manufacturing capacity is running at a rate which is outstripping the POS at the current level. If that happens, we keep producing at these levels, we'll build a little bit of inventory at the end of the year. If the market recovers, we'll probably have similar types of inventories from higher sales.

Luke Hannan, Analyst

Got it. And then, Glenn, I know you touched on this earlier in the call, sort of how you're thinking about online and the rest of the addressable market throughout the course of the year. But as the pandemic sort of made you reconsider or view your channels a bit differently and trying to access that customer through online versus other channels, have you guys given any thought about expanding those capabilities internally?

Glenn Chamandy, CEO

Well, the thing is that back in 2018, when we came to the market, we started our Back to Basics strategy, we looked at the market as we just have a retail market; we had a printwear market and said, look, if the world is emerging, there are two markets that are merging into one. That's what happened this year because the lion's share of all the sales that are being sold through our distributor network are heading on to online type selling, either people buying online from our distribution network or servicing online sellers, the local print business guy, let's say, for example, in Myrtle Beach, who never sold online is selling online today. So the whole world has gone online. I think we're still getting the benefit of that without having costs associated with servicing, shipping, and picking. That's the reason why we got out of the last year shift pick to the piece business and focused on our core competency and leveraged everything we have in our Back to Basics strategy. So it's definitely working. We're still able to address those markets, but we don't have the costs associated with the individual onesies and twosies. We think that's the reason why we're so confident in our ability to grow sales and reduce costs.

Operator, Operator

Your next question comes from the line of Patricia Baker with Scotia Bank.

Patricia Baker, Analyst

Rhod, I wonder if you could share with us your anticipated timeline with respect to getting your net debt within your targeted range of 1 to 2x?

Rhodri Harries, Executive Vice President and CFO

Well, I think if you look at our leverage ratio and think about LTM EBITDA, Q2 was a very tough quarter last year. So I think the first thing you have to look at that, Patricia, is it will drop away out of the calculation as we move into Q2. I think that will effectively have a big impact on bringing the ratio down. We're 3.5x on a reported basis at the end of Q4. As we go forward, we'll see how things play out. Ultimately, we are very pleased with the way Back to Basics is running, what we're doing with the business. We'll see how the first quarter plays out, see where we are in the second quarter. But I think that the movement of that EBITDA out of our ratios will have a big impact as we get to the second quarter.

Operator, Operator

And our next question comes from the line of Mr. Jim Duffy with Stifel.

Peter McGoldrick, Analyst

This is Peter McGoldrick on for Jim. As we think about the long-term 30% gross margin target, what factors are needed to bridge from run rate levels today? Is this a function of capacity utilization from existing manufacturing? Or does it rely on the new capacity ramping or more pricing? Just what other drivers might be required to build to those targeted 30% levels?

Glenn Chamandy, CEO

It's just a function of us continuing to drive our Back to Basics strategy as all the components come together as we maximize our manufacturing, continue to improve our underperforming areas of our business, grow the top line, and improve our mix. All those things combined will allow us to achieve our targeted 30% gross margin as we move to the future.

Peter McGoldrick, Analyst

Then near term, as we think about the 10% to 15% imprintables point-of-sale versus 2019 levels. Can you provide any insight into the view of distributor inventory alignment with these sell-through dynamics? Is there any contemplation near-term of restocking or destocking?

Glenn Chamandy, CEO

I would say that the current inventory in the channel is low but on a current POS basis. So in other words, with a negative POS basis is where we are in the channel today. If the market would materially come back, there would be a little bit more inventory required to support those sales in the channel at a low level.

Operator, Operator

And our final question comes from the line of Mark Petrie with CIBC.

Mark Petrie, Analyst

I just wanted to come back to the topic of the end markets and sort of the evolution that you're seeing with your final customer. Does that shift have implications for the profitability of those products for you or your distributor? Or does it have other implications with regards to your manufacturing footprint and the efficiency there?

Glenn Chamandy, CEO

It doesn't change anything for us or our customers because we still ship full cases, full truckloads on mass to our customers who do the distribution function, and that's what they do. So we're the brand; we do the marketing and the manufacturing of our products, and our distributors do the distribution function. For them, it's just going to a different outlet instead of going necessarily to a screen printer, it's going to an online screen printer or a screen printer that could even be the same customers we're selling to, but instead of selling it in his retail outlet, he's now selling online to consumers. It's just the question of how the net consumer gets the product, but the channel and the functionality is still exactly the same. It's just a question of how is it getting to the end user because even though we don't sell necessarily with more of a B2B type business, the fact is everything ultimately ends up in the consumers' hands. It's just a question of where they pick come up.

Mark Petrie, Analyst

Does it lead to any shift in mix?

Glenn Chamandy, CEO

Not really; I think the mix is pretty much consistent. I think mix is more driven by style changes like our preferences, like fleece has become a casual wear item, maybe again back to people working at home, leisure wear. Leisure was a growing category, if you look at all the fashion brands. They have a—they're getting out of suit and ties and going onto sweaters and other things because people are working at home. I think that trend will not change. That could also be a big driver of our success because people are becoming more casual. This working from home thing has taken off to suite for short. I think that's one area. Fleece has been a big driver of fashion. The basic side of our business is conducive to large gatherings and large events. If you go and look at the opening day at the baseball game, they're not giving away fashion T-shirts; they're giving away our basic type products. That's where we'll really get the big push on the recovery is when the basic side comes back because of large gatherings, rock concerts, NASCAR, and et cetera. I think we're well positioned. We have everything we need. We have all the products. We've got the brands. We've got the capacity. We're very excited about Bangladesh coming on, which is going to be the big evolution to the overall manufacturing of Gildan, which is going to support our international sales as well as support the continued fashion basics segment for us. Overall, I think we're well positioned, and we're looking forward to the recovery. I think we prepared quite well this year relative to all things being equal. As we get recovery, I think we're going to be rocking. And you guys had just touched on it, but I just wanted to ask about Bangladesh. Could you just remind us in terms of the timing of that being a contributor to your business? Yes, that's going to support—it’s going to come on in '22, and it's going to support really '23 sales, I mean, by the time it comes on in '22.

Operator, Operator

And at this time, there are no further audio questions. Are there any closing remarks?

Sophie Argiriou, Senior Vice President

Thank you, Paulie. Again, I thank everyone. We thank everyone for joining us this morning, and we look forward to speaking to you very soon. So have a great day. Thank you.

Operator, Operator

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.