Earnings Call Transcript - GIL Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for joining us for the Third Quarter 2022 Gildan Activewear Earnings Conference Call. All lines are muted to minimize background noise. Please note that this conference is being recorded on Thursday, November 3, 2022. Following the speakers' remarks, we will have a question-and-answer session. I will now turn the call over to Sophie Argiriou, Vice President of Investor Communications. Please proceed.

Sophie Argiriou, Vice President of Investor Communications

Good morning and thank you all for joining us. Earlier this morning, we issued a press release announcing our earnings results for the third quarter of 2022, along with 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 US Securities Commission and are available on the company's corporate website. With me today is Glenn Chamandy, Gildan's President and Chief Executive Officer; and Rhod Harries, Executive Vice President, and Chief Financial and Administrative Officer. This morning, Rhod will 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. 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 US Securities and Exchange Commission and the Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS financial measures are provided in today's earnings release and in our MD&A. And with that, I'll turn it over to Rhod.

Rhod Harries, Executive Vice President and CFO

Thank you, Sophie. Good morning all, and thank you for joining us on the call today. This morning we were pleased to report another strong quarter, particularly in the current macroeconomic environment. Specifically, despite tough retail and international markets, the strength of our vertically integrated manufacturing model and the resiliency of our large core imprintables Activewear business is clearly differentiating us and driving our ability to deliver. So, during the third quarter, we generated sales growth of 6% over record sales last year. We delivered another quarter of operating margin at the top end of our target range and we grew adjusted EPS by 5% while returning $125 million of capital to shareholders through dividends and share buybacks. At the end of the quarter, our balance sheet remained in great shape with net debt-to-EBITDA at 1.2 times as we continue to run at the low end of our target leverage framework. Moving on to the details of our results. Our sales for the quarter totaled $850 million with Activewear sales up 13% while hosiery and underwear sales were down 26%. Total Activewear sales were $742 million in the quarter compared to $656 million last year driven by higher net selling prices. Sales volumes to US and Canadian distributors grew over last year and included strong sell-through of ring spun products where we believe our market share continues to grow. The area where we saw weaker volumes was with national accounts or retail-related customers due to the broader industry decline in demand across retail. International shipments were also down due to ongoing demand weakness across these markets. In hosiery and underwear, where we generated sales of $108 million in the quarter, the decline in sales compared to last year reflected both weaker sell-through and the impact of tight inventory management by retailers. So on the whole and despite the challenging environment, we are pleased with the sales performance we were able to deliver in the quarter as travel, tourism, large events and the everyday use and replenishment nature of our products continue to drive underlying demand and offset softer retail market conditions. Moving on to our margin performance. Despite the headwinds of inflation across our supply chain, our margins for the quarter remained strong. We generated gross and adjusted gross margin of 29.7% in the quarter, essentially maintaining levels versus the second quarter of this year. Compared to last year gross and adjusted gross margins declined, as we expected reflecting declines of 540 and 170 basis points respectively compared to gross margin of 35.1% and adjusted gross margin of 31.4% in the third quarter of last year. Keep in mind, last year's margin on a GAAP basis included a $30 million or 370 basis point impact related to net insurance gains tied to the 2020 hurricanes in Central America, which were not in our numbers this year. Excluding this item, the gross and adjusted gross margin decline on a year-over-year basis was due to higher raw material and other manufacturing costs which more than offset higher net selling prices and favorable mix impacts. Turning to SG&A. Expenses for the third quarter came in at $79 million, down slightly versus the prior year, and as a percentage of sales SG&A came in at 9.3% compared to 10.1% last year. The decrease in SG&A expenses was due to lower variable compensation expenses and our continued focus on containing costs, which more than offset the impact of cost inflation and higher selling expenses. The improvement in SG&A as a percentage of sales reflected primarily the benefit of sales leverage. Overall, looking at our SG&A performance so far this year we continue to be pleased with how the team is managing around the 10% of sales level in this difficult inflationary environment. Summing up these elements. The sales increase combined with our gross margin and SG&A performance in the quarter translated to operating margin levels of 20.5% on a GAAP basis and 20% on an adjusted basis coming in at the high end of our target range. And after reflecting higher net financial expenses due to increases in interest rates and average borrowing levels, higher GAAP income taxes as well as the benefit of a lower outstanding share base driven by our share buybacks, we reported GAAP and adjusted diluted EPS for the quarter of $0.84. This compared to GAAP diluted EPS of $0.95 and adjusted EPS of $0.80 in the third quarter of 2021, reflecting a 5% year-over-year increase in EPS on an adjusted basis. Now, before concluding on our results let me provide some commentary on our cash flow and balance sheet. During the third quarter we generated $66 million of cash flows from operating activities, down in comparison to $243 million generated last year, mainly due to higher working capital requirements that were largely inventory related. And after funding capital expenditures of $74 million, we ended up consuming $7 million of free cash flow in the quarter. On inventory levels, at quarter end, our inventories totaled just over $1.1 billion, up from $725 million last year. As a reminder last year's inventories were at suboptimal levels due to production constraints from yarn labor shortages and the impact of the hurricanes in Central America from late in 2020. Higher inventories this quarter were also due to the impact of inflation on unit costs, as well as higher raw material and work in process levels given broader supply chain constraints. Finally, we finished the quarter with a net debt position of $944 million and maintained our leverage ratio at 1.2 times at the low end of our target range as mentioned previously. This sums up our results for the third quarter which combined with our record results in the first half of the year leaves us in a position of strength, as we navigate through near-term challenges related to the current environment. In this regard and importantly, our large North American business geared toward printable channels continues to benefit from demand, driven by travel, tourism and large events and is expected to remain relatively stable. On the other hand, where we are seeing continued weakness is with our national account or retail-related customers, which represents a smaller part of our business. Further, in international markets, we are also continuing to see ongoing softness in demand. From a profitability standpoint, we feel good about the actions we have taken to strengthen the economics of our business. And while the impact of higher costs will affect the fourth quarter, we remain committed to delivering on our operating margin targets. So in closing, we have a strong team and we believe a proven track record of operating excellence in both good and tough environments. This combined with the progress we are making in executing on the key pillars of Gildan's sustainable growth strategy driven by capacity innovation and ESG gives us confidence in our ability to deliver on our three-year growth objectives which we shared with you earlier in the year. This concludes my formal remarks. And with that, I will turn it back over to Sophie.

Sophie Argiriou, Vice President of Investor Communications

Thank you, Rhod. At this time, we are ready to begin the question-and-answer session. So I will turn it to the operator to begin the session. Operator, go ahead.

Operator, Operator

Your first question comes from the line of Mark Petrie of CIBC.

Mark Petrie, Analyst

Good morning, thanks for the comments, Rhod. Hoping you can just give us a little bit more color specifically on the volume trends that you're seeing across your channels into the early part of Q4?

Rhod Harries, Executive Vice President and CFO

Thank you for the question, Mark. As we look at the volume trends moving into Q4, we are quite pleased with how our distributor business is performing. We are experiencing strong growth driven by travel, tourism, and event-related experiences, similar to what we observed in Q3 and to some extent in Q2. This support is a significant factor in our business, contributing to the strong Activewear growth we achieved in Q3, which was 13%. However, in other areas related to retail, we noticed weaker point-of-sale activity as we progressed through Q3. Retailers are continuing to reduce inventories in line with broader industry trends, and we saw more softness in Q3 compared to Q2. In international markets, we are also experiencing a continuation of demand weakness as we head into Q4. Overall, our outlook is mixed, but we do have a core business that is performing well as we enter the fourth quarter. It's important to note that last year's Q4 was particularly strong due to restocking during that period, and given the current environment, we do not expect to see the same restocking this year. Overall, as we mentioned in our Q3 commentary, the mixed trends are carrying into Q4.

Mark Petrie, Analyst

Thank you for that information. Regarding my follow-up question about the inventory in the distributor channel, I understand that we are not expecting significant restocking. Do you believe the situation is stable, and what is the current outlook for distributor inventories?

Rhod Harries, Executive Vice President and CFO

Yes. I think if you look at distributor inventories today, I would say we are at normalized levels I think is the way to think about it for where POS is running. So, we have seen inventories move with POS as we've moved through the year and as we've effectively come out of what was a much weaker environment as we were coming through the pandemic we saw strength building in 2021. And we continue to see strength in those inventories as we've moved into 2022. That doesn't mean to say that they're perfect. There are definitely areas where they still need some support, I would say. But overall, I would say inventory levels are normalized and where they should be effectively at this juncture. And we'd expect them to continue along those lines as we move into Q4. And as we move into obviously more of an uncertain environment, but I would say they're at normalized levels and probably optimized for where POS is running currently.

Mark Petrie, Analyst

Okay. Thanks. And just last question on OpEx. I mean it's the lowest margin rate we've seen from you guys and down from last year on a dollar basis. Could you just give us a bit more color on the drivers there? And then what's a reasonable way to think about the cost base either on a rate or dollar basis going forward? Thanks.

Rhod Harries, Executive Vice President and CFO

Yes. When discussing OpEx, are you referring specifically to SG&A, or are you looking for a broader perspective on our operating costs and gross margins? Could you clarify that for me?

Mark Petrie, Analyst

I was specifically focused on SG&A. I would appreciate any comments you have, but my main question is about SG&A. Thank you.

Rhod Harries, Executive Vice President and CFO

We observed strong performance in SG&A during the quarter, with it comprising 9.3% of sales, which is quite low. We are pleased with this outcome as we strive to manage costs in the current inflationary climate. We experienced lower variable compensation this quarter, which contributed positively, amounting to roughly 60 basis points. Overall, this quarter was particularly favorable, and we benefited from sales leverage. We remain committed to maintaining effective SG&A as we continue to focus on the fundamentals. Looking ahead to Q4, we anticipate a slight increase, targeting around 10% for SG&A. While some quarters may trend below this level and others may exceed it due to the environment, it remains a priority for us. Long-term, as we grow and realize the expected growth, we foresee the possibility of reducing SG&A further. Nonetheless, we are very satisfied with our performance in the last quarter, especially compared to what we expect in the upcoming quarters.

Mark Petrie, Analyst

Okay. Appreciate all the color. All the best. Thanks.

Operator, Operator

Your next question comes from Jay Sole of UBS.

Jay Sole, Analyst

Great. Thank you so much. Rhod, could you give us a little bit of an update on the factory capacity expansions in Central America and Bangladesh? Just maybe give us an update on the progress you made over the last 90 days. And any increase in visibility into the orders that are coming in doable to fill up those factories as you look out into next year?

Rhod Harries, Executive Vice President and CFO

Our plans for Bangladesh are on track. As we mentioned last quarter, the plant is set to start in the second quarter of 2023 and will then gradually be built up. Therefore, Bangladesh will significantly contribute to our capacity in 2024 as we need time to ramp up operations. Regarding the rest of our capacity, it is operating as expected, and we have everything in place to support our growth as we move into 2023.

Jay Sole, Analyst

Terrific. Thank you so much.

Operator, Operator

Your next question comes from Stephen MacLeod of BMO Capital Markets.

Stephen MacLeod, Analyst

Thank you. Good morning, everyone. I just wanted to follow on Rhod some of your commentary around the Q4 expectations and specifically with respect to the gross margin you talked about the pressure accelerating in Q4. I'm just curious if you can give a little bit of color on what magnitude you might be expecting? And then along those lines as well, would it be safe to say that Q4 gross margin pressure reflects what we saw in terms of peak cotton prices?

Rhod Harries, Executive Vice President and CFO

Thank you for the question, Steve. While we're not providing specific guidance, I'm happy to discuss the trends for Q4. We will see the effects of increased raw material costs becoming more noticeable than in Q3. There's a lag in how cotton prices affect our profit and loss, and as these prices rise, their impact will be more evident as we transition into Q4. We might also see some of this carry over into Q1 of next year. As a result, we expect higher raw material costs to exert additional upward pressure on our margins. Additionally, our SG&A performance will not be as strong as in Q3, which means our operating margins are likely to be lower in Q4 compared to Q3. However, we remain confident in achieving margins within our target range and are pleased with how margin performance has evolved throughout the year. The team has effectively managed costs to mitigate the strong inflation affecting all areas. Nonetheless, we do anticipate some pressure on margins as we move into Q4 due to these factors.

Stephen MacLeod, Analyst

That's helpful. Thank you. I wanted to ask about the trends we are seeing in Q4. I know you've provided some great insights, but I'm curious if you've noticed any impacts from macro weakness in specific areas of the distributor business, or if everything has continued to progress across all channels.

Glenn Chamandy, President and CEO

No. Look I think our distributor business is like what Rhod said earlier is really performing quite well be honest with you. And I think actually in Q4, we've actually seen some increases in fleece for example, which is helping the overall I think sales growth within the distributor channel. So we had a very warm summer this year. So fleece sales historically are strong in the fall and it's taken a little bit longer for them to kick in but the sales in fleece are actually very strong now, which is continuing to support the outlook of the distributor business as we move into Q4.

Stephen MacLeod, Analyst

Okay. That’s great. Thank you very much.

Operator, Operator

Your next question comes from Luke Hannan of Canaccord.

Luke Hannan, Analyst

Thanks. Good morning. Glenn, I think you had mentioned last call that in past periods where there are higher cotton prices, some of your competitors had pulled back on production. And I think you alluded to maybe that same dynamic playing out in the coming quarters. Have you seen any signs of that yet?

Glenn Chamandy, President and CEO

Well, I think that there's been definitely a reduction in overall capacity primarily driven I think by the poor retail conditions in the market. So there's definitely not just in our hemisphere I think that's everywhere. I mean, that's a global phenomenon. I think that there's been a big reduction in overall capacity adjusting in line with retail volumes. I mean, that's probably a fair statement in today's environment, which I think at the end of the day has I think will give us the ability to excel as we move into 2023. We're well-positioned from a capacity position to support the growth in 2023 as we exit 2022.

Luke Hannan, Analyst

Okay. And then moving on to the retailer destocking. I appreciate, it's tough to get some visibility here. But if we go back to the last time where there was a prolonged period of retailer destocking can you give us any idea is today sort of a close proxy to what it was like then? Was it short-lived? The general tone seems to be that this overhang is taking a bit longer than maybe past overhang? What are the sort of dynamics at play here?

Glenn Chamandy, President and CEO

It's difficult to provide a clear answer. From a retail standpoint, this is likely the worst situation we've encountered in a long time. We’ve experienced an unusual pullback in categories like underwear, which are usually considered staples. There is indeed a notable decline. Eventually, things will stabilize, but the pressing question is when that will happen. One factor is that major retailers have significantly higher inventory levels as they were focused on increasing volume. Until those inventories are cleared and converted into cash, we can expect a tight market. However, looking at our situation, we entered 2022 with limited capacity and did not pursue new programs. As we approach 2023, we've put in considerable effort this year and have identified several new opportunities that will foster growth despite the negative comparisons from existing programs and current sales. We are hopeful that as we transition from 2022 to 2023, if the market continues to recover, we will be in an even stronger position. Thus, we remain cautiously optimistic as we move into 2023.

Luke Hannan, Analyst

Got it. Thank you very much.

Operator, Operator

Your next question comes from Brian Morrison of TD Securities.

Brian Morrison, Analyst

Hi. Good morning. I want to follow up on inventory specifically at Gildan. You seem to be back to pre-pandemic levels. And Rhod you mentioned some of that is cost inputs. But I understand there's production discipline in the industry. But how do you think about price stability and sustaining that gross margin outlook as you get a little bit of pressure here with the decline in commodity prices?

Glenn Chamandy, President and CEO

I want to start with the question. Pricing in the market is very stable, I would say. Pure cotton is one part of our input, and while it's the largest, it's still just one part. As a company, and I believe the whole industry since we're the market leader in setting prices, we have set cotton prices around the dollar level. To put that into perspective, some of that cost will be absorbed in margins because we have only raised prices to the dollar level, not to the peak when cotton prices skyrocketed in July. Other significant inflation is still occurring. Energy prices are up significantly, both in Central America and the United States. Labor costs continue to rise in every aspect. Polyester prices have increased sharply as it is a byproduct of oil, and there are other rising input costs. Even though cotton prices are starting to decrease, other factors have not. I would say there is definitely support for pricing as we move forward. We haven't raised prices all the way up, and currently, prices in the market remain relatively stable. Everyone in the industry is facing high costs, and these elevated raw material costs will likely take at least six to nine months to work through the industry due to weaker sales. Therefore, we're not particularly concerned about this situation at the moment.

Rhod Harries, Executive Vice President and CFO

Okay. Regarding inventory, Brian, if you look at the increase, I've mentioned what's driving that. I'd estimate that about 40% of the increase comes from our raw materials and work-in-progress, which is impacted by costs. We are carrying higher safety stocks due to broader supply chain constraints that we've been facing. As a result, we have been maintaining elevated levels of raw materials and work-in-progress. While costs are a factor, they will eventually balance out. As the overall environment improves and the tightness in various inputs, like dyes and trims, eases, we won't need to maintain the same inventory levels as in the past, and that will naturally adjust. On the finished goods side, the increase is also driven by costs and the need for more units. As mentioned, costs will ultimately stabilize, and, as Glenn noted, we don’t foresee significant price exposure when it comes to selling this inventory in the market. From a units perspective, we've needed more units to support the business. Overall, we feel confident about our inventory levels, especially considering the adjustments we anticipate moving forward, and we expect to benefit from this as we progress into 2023.

Brian Morrison, Analyst

Okay. Very thorough. Thank you, both. One follow-up question on Bangladesh. Rhod maybe, I understand your ramp production fall into 2024 I assume you'll transfer some production from Honduras. As it ramps up should there be any drag on margins from Bangladesh or is it insignificant?

Glenn Chamandy, President and CEO

No. There'll be no drag on margin or be insignificant. And we'll continue to manage our capacity based on the sales outlook and we're in a good position today to support sales. And if we need to moderate production a little bit it's not an issue for us at all either, which would not be any drag on our margin performance.

Operator, Operator

Your next question comes from Vishal Shreedhar of National Bank.

Vishal Shreedhar, Analyst

Thanks for taking my question. I just wanted to get your thoughts on a few issues that have come up in the past or opportunities. In the past Gildan has talked about the opportunity associated with nearshoring and retailers increasingly looking at private label. I wonder how these conversations are going with retailers? And if you expect Gildan to capitalize on any of these opportunities in 2023?

Glenn Chamandy, President and CEO

Well, that's why I said a little bit earlier. Look at we – at the beginning of 2021 moving into 2022, we were so tight capacity especially after surviving the hurricane that we never really focused on new programs. And as we began 2022, we obviously aggressively started looking for new opportunities to support 2023. So we do have new programs and new opportunities both from near-shoring and retailers. And so that's part of our – obviously our overall growth plan and strategy to support the targets that we set out over the three-year period. So definitely we'll see some of that as we move into 2023.

Vishal Shreedhar, Analyst

Okay. Thanks. And I know you touched on this but with respect to the capacity expansion plans and the rebound that you're seeing in travel and tourism as you anniversary kind of that period of weakness and the consumer gets back caught up on those end markets. Do you expect the stability that you're seeing in Printwear to continue, or do you expect that to kind of decline as it historically has with consumer confidence?

Glenn Chamandy, President and CEO

No, we expect it to continue to grow. I mean, and don't forget there's definitely a portion although our distributable business is doing really well, there is a portion of the product that they sell that gets resold into the consumer space as well, right? So it could actually be going better because if you look at the beginning of the year the POS and sales in our US distributor business was much more robust than it is today. It's still good. It tailed off a bit. And part of the part that actually tailed off was the part that was more related I think around the consumer side of it. So we're optimistic. We're in a good position. We think that we're well positioned both from a capacity place as well as our market that as we sort of see this whole thing aside that there'll be a lot of upside in terms of our sales volume and combining that with new opportunities from near-shoring and retail shelf space we're well positioned as we move into 2023 and 2024.

Rhod Harries, Executive Vice President and CFO

I'd also add to that Vishal in the Printwear business the corporate promotional side has never really come back to the strength that it was pre-pandemic and that's a driver as well in the business that probably has been impacted by the macro weakness that we've seen. So as Glenn said, there's a number of drivers and then you layer on different areas of the business which will start firing again. Overall, we see good strength.

Vishal Shreedhar, Analyst

Okay. And in the past during periods of weakness, Gildan has been opportunistic and capitalized on acquisitions. Wondering if that's something that you see potential as an option for Gildan particularly given the strength of your balance sheet?

Glenn Chamandy, President and CEO

Look, we're focused on our build and growth story. So we believe that our capacity is in place, our cost structure is in place. And objectively, we're going to continue to stay focused and build organic growth in line with our three-year targets over the next 24 months.

Operator, Operator

Your next question comes from Paul Lejuez of Citigroup.

Brandon Cheatham, Analyst

It's Brandon Cheatham on for Paul. Thanks for taking my question. Just wondering if we could dig in a little bit on kind of price increase dynamics and how much that helped sales in the third quarter? And then what units trended during the quarter?

Glenn Chamandy, President and CEO

Okay. Thank you for the question. So if you look at price in the third quarter, it turned out basically the way I think we had talked about on the last call that we had for the Q2 earnings call. So effectively price came in the mid-teen range, which was basically where I had been traveling effectively, if you look at Q2 and Q1. So consistent I would say price impacts. Now the one thing to call out there is that's going to actually start to moderate as we go into Q4 because there we're comping price increases in Q4 of last year. And so you'll see that price impact starting to drop down. And then from a volume perspective, we were down overall. Obviously, we had 6% revenue growth. We did see mid-teens on the price – but again that was – it was mixed depending on where you're looking. So we had good strength on the distributor side as we've talked about whereas the retail side and the international side, there you saw because of the – effectively the POS weakness destocking, I would say tougher comps from last year negative volume. So I would say decent price offset by mixed impacts of volume across the board and that ultimately delivered the growth for the quarter.

Brandon Cheatham, Analyst

Got it. And so you really start to annualize that price increase in the first quarter of next year. Understanding that you took some price in 4Q last year. Is that correct?

Glenn Chamandy, President and CEO

I think as we head into the first quarter of next year, the annual comparisons and the impact of pricing will clearly lessen as we enter Q1 and Q2.

Brandon Cheatham, Analyst

Got it. That's helpful. And sorry if I missed it, did you guys quantify where POS is trending today and what it was in the quarter?

Glenn Chamandy, President and CEO

I think we gave general commentary on what we're seeing across the various challenges.

Brandon Cheatham, Analyst

Got it. And have you guys internalized Frontier Yarns capacity fully? I know that that was the debottlenecking but have you kept any of those external contracts on as capacity constraints have seemed to alleviate?

Glenn Chamandy, President and CEO

Yes. It was fully internalized. And it's fully part of our vertical integration today.

Brandon Cheatham, Analyst

Got it. I appreciate it. Good luck.

Glenn Chamandy, President and CEO

Thank you.

Operator, Operator

Your next question comes from Sabahat Khan of RBC Capital Markets.

Sabahat Khan, Analyst

Thanks for the follow-up on the volume and pricing discussion. As you begin to see some of the impacts from the price increases and considering the volume trends looking ahead, how are you planning to approach promotional activities or other methods to drive volume? Do you think the international channel might start improving at some point? Additionally, can you provide some insight into the trends between the North American distributor channel and the international one so we can better understand the outlook for the next couple of quarters?

Glenn Chamandy, President and CEO

Look, I don't think that price is going to drive volume in this market. So as we go through we'll navigate through, I think a little bit of volatility on volume. But as we move into 2023, our objective is to support new opportunities really. That's what we're going to get the volume now. If the market does rebound by 23%, then we'll also get supported by the growth in the existing volumes that we do have. But price is not going to drive volume in this market. I mean it's just not going to move the needle. So if that answers your question but what's going to move the needle for us is obviously new opportunities, new growth, there are near-shoring and the things that we really laid out in our long-term planning.

Sabahat Khan, Analyst

All right. That's helpful. I guess are you able to maybe parse out? I think you called the volumes were down in Q3 in wholesale, but maybe how much international might have been down? And I think you indicated North America might have been positive, are you able to just give some perspective on that?

Rhod Harries, Executive Vice President and CFO

I don’t want to differentiate between the various channels too much. However, you can analyze the sales growth and the positive distributor volume we've mentioned. In retail, volumes seemed to be declining, likely even more than the point of sale figures due to de-stocking. International sales were primarily affected by a negative point of sale trend due to market weaknesses. On the Innerwear side, we’ve reported similar findings, driven by point of sale weaknesses and de-stocking as well. Overall, we are facing mixed trends, but the strength of our distributor business remains solid. Looking ahead, we expect the retail situation to improve as retailers manage their inventory levels. Our products are essential replenishables, and they require shelf space. We're also exploring new programs to enhance both sell-in and sell-through. Currently, the environment is challenging from a volume standpoint, although there are some positive aspects. Nevertheless, the overarching trends that support our business remain intact, influenced by macro factors like casualization, the creator economy, near-shoring, private labels, and ESG considerations. All these elements contribute to strong demand for active wear, which reinforces our confidence in meeting our three-year targets. Although we are currently in a weaker environment, we will see how things progress in 2023. We cannot predict the future, but these positive trends are instrumental in driving our business in the long run.

Sabahat Khan, Analyst

Great. Thanks for that Glenn. And just one quick one, through kind of the last couple of years there's been a benefit from kind of the stay at home worker or some of that I think creator economy that you referenced. Are you finding that some of that business is still with you? What is kind of the longer-term outlook for that sort of work from home consumer maybe some of those online sales that you started to gather over the last couple of years? Just some color there.

Glenn Chamandy, President and CEO

Well, that's what we said. I mean, those online sales are maybe more relevant to retail. Let's say, for example, consumer the end users or consumer. So our distributor business in the first quarter was up until sometime in mid-March was significantly higher than it is today. That part of the business we think is the part that fell off. What didn't fall off is all the travel, team sports, uniform, rock concerts, that part is still, NASCAR, sporting events. I mean that part is still strong and driving our volume. The part that we think in the distributor area that actually mitigated a little bit was exactly the part that was more addressed to consumers. So I don't think that's going away. I think, that's just, the broader overall consumer market and there's just a little bit of that within our distributor segment. So, overall, we're still very optimistic and I think that we're well positioned.

Vishal Shreedhar, Analyst

Great. Thanks very much for that.

Operator, Operator

Your next question comes from Chris Li of Desjardins.

Chris Li, Analyst

Good morning, everyone. My first question is just going back to cotton. If you assume that cotton prices stay where they are and assuming the selling price stability is maintained, do you expect cotton to be a tailwind for margins next year, assuming the hedge cost makes you will likely be lower than the current year? Thank you.

Glenn Chamandy, President and CEO

There are a lot of factors at play, so we can’t predict exactly where we’ll end up. However, we still face inflation in areas like energy, labor, and other input costs, with polyester offsetting cotton. There are numerous elements to consider. That said, we are confident in maintaining our operating margins, and we believe we will stay within that range as we head into 2023, supported by sales growth.

Chris Li, Analyst

Okay. That's helpful, Glenn. And maybe another one just maybe a follow-up on the comments you’ve been making about new program opportunities for next year. Can you maybe drill down for us a little bit where are you seeing the opportunities? How much visibility do you have? And maybe just the size of the opportunity for next year, please? Thank you.

Glenn Chamandy, President and CEO

The opportunities are integral to our long-term strategy focused on nearshoring retailer private label, which represent significant growth areas for the company, along with continued expansion in our distributor and national account segment. This is where we are identifying new opportunities, arising from our increased capacity. Last year, we were so constrained that we didn't want to take on new programs for 2022. However, as we enhanced our capacity throughout the year, integrated Frontier, and gained insights into more opportunities, we began actively pursuing these programs. We now have new volume opportunities that will drive growth in 2023. The impact on our existing business will depend on market performance, and that’s something we need to keep an eye on. Nevertheless, we are well positioned and doing everything possible to support our growth.

Chris Li, Analyst

Great. Okay. Thanks, Glenn and all the best.

Rhod Harries, Executive Vice President and CFO

Okay. Thank you, operator. Before we close off the call, I would just like to mention to everybody that many of you know that Sophie will be retiring at the end of this year. And so this has been Sophie's last earnings call. At Gildan we have many talented employees across the organization. That’s what drives Gildan every day. And Sophie really has been one of them. And really over her last 17 years that Gildan has made an outstanding contribution to the IR area and has, obviously, interacted with many of you. So, I think, Glenn and I and the rest of the team would just like to thank Sophie and wish her all the best as she heads towards a very well-earned retirement. And unfortunately or maybe fortunately, no more quarterly calls. So with that, thank you everybody. Really appreciate you joining and we look forward to talking with you going forward. Thank you and thank you Sophie.

Sophie Argiriou, Vice President of Investor Communications

Thank you, Rhod.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.