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Executives

Laurence Sellyn - Chief Financial & Administrative Officer and Executive Vice President

Glenn Chamandy - Chief Executive Officer, President and Director

Sophie Argiriou - Director of Investor Communications

Analysts

Candice Williams - Canaccord Genuity

Hugues Bourgeois - National Bank Financial, Inc.

Eric Tracy - FBR Capital Markets & Co.

Mark Petrie

Scott Rattee - Blackmont Capital

Jessy Hayem - TD Newcrest Capital Inc.

Martin Landry - Desjardins Securities Inc.

Spencer Churchill - Westwind Partners

Anthony Zicha - Scotia Capital Inc.

Omar Saad - Crédit Suisse AG

David Glick - Buckingham Research

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Tal Woolley - RBC Capital Markets, LLC

Claude Proulx - BMO Capital Markets Canada

Kenric Tyghe - Raymond James Ltd.

Gildan Activewear (GIL) Q1 2011 Earnings Call February 8, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Gildan Activewear Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] And I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed.

Sophie Argiriou

Thank you, Caris. Good afternoon, everyone, and thank you for joining us. Earlier, we issued our press release announcing our earnings results for the first quarter of fiscal 2011 and our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents will be filed with the Canadian Securities Regulatory Authority and the U.S. Securities Commission and are also available on our website at www.gildan.com.

I'm joined here this evening by Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Laurence will be providing you with a brief overview of our first quarter financial results and our business outlook, after which, we will open the call to questions.

At this time, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authority that may affect the company's future results. I would now like to turn the call over to Laurence Sellyn.

Laurence Sellyn

Good afternoon. We are pleased to announce today a fourth successive quarter of record results. Sales and earnings were both records for the first quarter of the fiscal year. These results reflected very strong sales for activewear, partially offset by higher cost of cotton and startup inefficiencies in distribution and manufacturing which negatively impacted results for socks and underwear.

Net sales revenues for the first quarter were $331 million, up 50% from the first quarter of fiscal 2010. And we achieved EPS growth of 25% over the first quarter of last year. EPS in the quarter was $0.30 per share. Unit sales volumes of activewear and underwear increased by approximately 66.5% from the first quarter last year and net selling prices for activewear increased by approximately 12%. The increase in unit sales was due to inventory replenishment by U.S. wholesale distributors who have reduced inventories in the first quarter of last year; continuing strong recovery in sales demand from screenprinters, which increased by approximately 8% in the first quarter; continuing strong growth in international and other screenprint markets; and strong growth in activewear and underwear for mass-market retailers from a small base in fiscal 2010.

The strong growth in unit sales for activewear and underwear was achieved in spite of production capacity constraints and low finished goods inventory throughout the quarter. The company was unable to fully service demand for its brand in the U.S. distributor channel, resulting in a decline in its market share during the quarter, to 60.2%, compared with 61.3% in the first quarter of last year and 64% in the fourth quarter of last year.

Gildan's share of inventories in the U.S. distributor channel was 52.4% at December 31, compared to our market share in the first quarter of 60.2%, and we are comfortable with our level of inventories in the distributor channel at the present time. We continue to have a very high level of open orders from distributors in the second quarter.

The significant increase in activewear net selling prices was due to the implementation of previously announced selling price increases, as well as lower promotional activity due to the favorable market conditions. A further selling price increase averaging approximately 7% was announced in the U.S. screenprint market in January. In line with previous selling price announcements, this increase will not be applicable to back orders.

We indicated in our press release that ACNielsen is discontinuing the S.T.A.R.S. report, which we have historically utilized to track unit volume shipments of activewear from U.S. wholesale distributors to U.S. screenprinters. Going forward, we will now subscribe to the CREST report produced by Capstone Research, which uses a slightly different distributor database and reflect some differences in methodology.

Sales of socks were $61.2 million, down 9.3% from $67.5 million in the first quarter of last year. The main reason for our failure to achieve the sales growth, which we have projected for the quarter, was our difficulty in servicing retail demand from our new U.S. distribution center. Continuing ramp up issues at these facility significantly impacted our sock deliveries and sales during the peak Christmas holiday selling season.

Gross margins in the first quarter were 24.7% compared with 29.8% in the first quarter last year. The decline in gross margins compared to last year was due to an increase in cotton cost to $0.78 per pound from $0.60 per pound in the first quarter last year, which negatively impacted gross margins by 450 basis points, and higher costs for energy and other purchase cost inputs, together with ramp up and the factoring inefficiencies, which resulted in very low gross margins for socks and underwear, as well as additional sewing overtime cost to maximize production of activewear and our lower valued activewear product mix, due to a higher proportion of basic T-shirts.

These factors more than offset the positive gross margin impact of the significantly higher net selling prices for activewear. Although selling general and administrative expense were 12.6% of sales, compared to 15.4% in the first quarter a year ago, SG&A expenses increased in dollar terms to $41.6 million compared to $34 million last year. This increase was largely due to the startup inefficiencies of the new Charleston retail distribution center, which negatively impacted SG&A expenses by approximately $3 million and by higher volume driven distribution expenses at our Eden, North Carolina screenprint distribution center which, however, were partially offset by efficiency improvements at this facility, largely as a result of our ongoing capital expenditure project to expand and automate the facility.

The results for the Sock business are obviously a disappointment and a number of action items are being implemented to address these issues. We expect to achieve significantly improved results for socks during the course of the balance of fiscal 2011 as a result of the following: Number one, achieving our efficiency goals for the Charleston distribution center, as a result of creating programs and technology enhancements which are currently being implemented; two, completion of the ramp up of new Rio Nance IV sock facility; thirdly, the closure of the remaining U.S. sock manufacturing facilities, which was announced last week and which will result in more than 10 million dozens of high-cost production be consolidated into Rio Nance IV; four selling price increases averaging at a range of 5% to 6% were implemented with retail customers in January. And further significant price increases have been agreed, which will take effect in the second half of the year. In addition, retail customers have accepted product modifications which will reduce manufacturing costs; and, fifthly, the company is in the process of negotiating selected new sales opportunities in socks, which are expected to be significant to our retail growth strategy.

In addition, we are currently consolidating our underwear, sewing and packaging at one of our Honduran sewing factories. Our operator training programs are progressing well, and we are implementing substantial selling price increases for our underwear program, which would be communicated to our retail customers. Our transition to the MVS [Murata Vortex Spinning] yarn spinning technology will result in significant savings in underwear manufacturing costs, as well as eliminate import duties on products made from imported yard, which do not qualify for duty-free access to the U.S. market under CAFTA [Central American Free Trade Agreement].

We have updated the assumptions and our full-year outlook in our release today, although we recognized that it is obviously more difficult to provide forecasts in the current environment of unprecedented volatility in cotton prices, and to be able to predict the impact of higher selling prices and industry demand.

Sales are now projected to be slightly in excess of $1.6 billion. The company has reflected the impact of the recent 7% selling price increase in the screenprint market and the price increases, which we are implementing for our retail customers. But the forecast does not, at this time, anticipate any further price increases which have not yet been announced. We will, however, seek further selling price increases in the second half of the fiscal year if cotton prices do not correct significantly from current levels.

We are currently forecasting overall industry demand growth of approximately 3% in the U.S. screenprint market for the balance of the year, which will still translate into industry demand levels that are well below the level of demand before the economic downturn. Nevertheless, we have slightly reduced projected sales volumes in the second half of the year, compared to our prior forecast, in order to provide for the possible negative impact of increases in selling prices and industry demand, although we currently intend to continue to run all of our manufacturing facilities for production of activewear and underwear at full capacity.

Gross margins are still forecasted to be approximately 25% as indicated when we initiated fiscal 2011 guidance in December. The positive impact of further selling price increases, which have already been implemented, is currently projected to be fully offset by higher-than-previously projected cotton cost increases in the second half of the fiscal year and by lower-than-previously projected manufacturing and distribution cost reductions. The company's cotton requirement for consumption in the fourth quarter of the fiscal year are approximately 55% hedged.

Our revised outlook assumes that cotton costs for consumption of fiscal 2011 average slightly in excess of $1.10 per pound compared to our previous assumption of $1 per pound. Cotton costs in the first quarter, which we have just reported, was $0.78 per pound. Cotton cost in the second quarter are projected at below $0.90 per pound, which is lower than previously projected, due to the timing of the flow-through of the opening inventories. Cotton costs in the third quarter have been essentially covered as approximately $1.25 per pound, which is higher than projected in December. As a balance of our unfilled cost and requirements, it has been filled at higher prices and due to also the timing of consumption of inventories.

Based on filling the balance of our open requirements for consumption the fourth quarter, and close to current cotton prices, cotton costs in the fourth quarter will be approximately $1.40 per pound. Selling price increases implemented to date are estimated to pass through cotton cost increases up to approximately $1.25 per pound.

For the second quarter of fiscal 2011, we are currently projecting net sales revenues of approximately $375 million, up approximately 15% from the second quarter of fiscal 2010. And gross margins of close to 27% compared to 27.8% in the second quarter of fiscal 2010.

Selling, general and administrative expenses are expected to be slightly lower than 10.5%, as they are not expected to increase further in line with the projected increase in sales.

Finally, we ended the first quarter with cash and cash equivalents of $235 million, which was $23 million lower than the year end position, due to cash requirements in the first quarter to finance increased inventories and our capital expenditure program.

Total capital expenditures for fiscal 2011 are still projected to be in excess of $150 million, including the construction of Rio Nance V, which is now underway. We are also projecting further increases in inventory levels including the impact on inventory unit cost of higher cost than in other purchase input cost.

Our initial quarterly dividend for the first fiscal quarter will be paid on March 18, 2011, to shareholders of record on February 23. We are confident that our strong balance sheet and cash flow generation will support an ongoing quarterly dividend, while at the same time, retaining significant financing capacity to pursue our organic growth strategy as well as explore selective acquisition opportunities, which may potentially complement our organic growth.

Sophie Argiriou

Thank you, Laurence. This concludes our formal remarks. We are now ready to start the Q&A session. Please limit your questions to two or three in order to give everyone the opportunity to ask their questions. And of course, time permitting, we'll circle back for more questions. Thank you. Caris, can you just take us through the logistics?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Martin Landry with Desjardins Securities.

Martin Landry - Desjardins Securities Inc.

Could you give us a little bit more detail on the inefficiencies at your distribution center? What exactly is happening? And what exactly is going on for you to have inefficiencies over there?

Glenn Chamandy

Martin, this is Glenn. The inefficiencies are mainly due to the consolidation of approximately four distribution centers into Charleston, which we moved during Q4. So we made a big push to consolidate four distribution centers into our new

state-of-the-art facility. The facility was configured completely different than our other facility. So there was new processes, new systems that need to be implemented and there were some training issues in terms of bringing the people up to speed and as well as probably a little bit of management oversight, in terms of the readiness for us to make the move. Since the end of the quarter, we're now currently running at a full efficiency, and most of these problems are behind us. And obviously, it happened, unfortunately, in the height of the season, for back to school -- for Christmas and holiday. So it's one of these events where you just can never catch up and, ultimately, get lost -- we lost revenues, and we spent additional training dollars, employee hours and dollars, and as well as transportation and other costs associated with the ramp up. But the issues are behind us right now, and the facility is running smooth as scheduled and we feel very comfortable at this point going forward.

Martin Landry - Desjardins Securities Inc.

So you don't anticipate any impact for Q2?

Glenn Chamandy

Not in distribution cost, no.

Martin Landry - Desjardins Securities Inc.

And you've mentioned that you're anticipating a little bit of a weakness in demand in the industry. What leads you to believe that we're going to see weakness in the demand, it looks like volumes have been up quite strongly, even though we've seen some price increases. Did you see any signs yet of weakness in demand?

Glenn Chamandy

No.

Laurence Sellyn

No. Demand, as we said, is continuing strong. We have a very large open order position, and there's nothing that we see, that would indicate any weakening of demand. And as we mentioned on the call, we're planning to continue to run our facilities at full production capacity. What caused us to reduce our forecast is simply the unknown that we've announced further significant increase in selling prices. It's likely that there would be further selling price increases if cotton stays up at the present levels. So we've provided -- we don't know what the demand is. Last that you see is we'll provided it for a possible impact of lower demand thus the cost of the higher prices.

Glenn Chamandy

But as we speak, I would say that our business has never been stronger. We've never been in a position where we've had this level of back orders ending Q4, Q1 and now going into Q2. So we have a lot of momentum behind our brand and our business. And we're running full out. We'll continue to maximize all of our production facilities, I mean, I spent actually my full time in working with the production and planning department. Making sure that we're hitting our goals and making sure that we're maximizing production throughout all the facilities.

Martin Landry - Desjardins Securities Inc.

And did you start hedging for fiscal '12 yet for your cotton?

Glenn Chamandy

We've hedged a little bit but not anything significant. Our objective right now is to -- in terms of all of our hedging, is to mitigate exposure. Nobody in the world today has a crystal ball. And the last thing -- the worst thing that could happen is, like what happened in 2008, when cotton went from $1 down to $0.45 overnight. So what we're trying to do is to mitigate exposure, and we're buying in sequence, where we think we have the visibility in our business. And we feel comfortable with purchases so far. And we think that today, cotton is somewhat probably overvalued. There's a lot of cotton being produced for next year. The first National Cotton Council report came out, where the acreage is estimated, it's going to be increased by 14%. We're hearing it could be up to even greater than that, up to 21.5 million bales relative to 18.5 million this year. So there's a lot of variables that could move the cotton market. Chinese -- to move the market. So what we need to do is just be careful with these volatile times, taking a step at a time and just trying to mitigate exposure. And that's what we've done so far and we'll increase our prices proportionally to offset the cotton as we go forward.

Operator

And your next question comes from the line of Eric Tracy with FBR Capital Markets.

Eric Tracy - FBR Capital Markets & Co.

Maybe I'll just follow-up on the cotton conversation, and with respect to the gross margins sort of assumptions holding it to 25% level, can you -- I guess, on a higher cotton cost now, plus you talked about some lower manufacturing efficiencies. Is it simply just the prices? Because you would think -- you would still get further dilution on the gross margin. Can you just tell me what read through sort of reconciling that maintaining of that gross margin appearance?

Laurence Sellyn

So I'm reconciling from 25% to 25%. The factors that all offset each other. So the price increases that we've already announced and implemented, but not including any further price increases, positively impact margins by 3%. The impact of further increases in cotton cost, since we've provided guidance in December, has a 2% negative impact and the impact of the manufacturing inefficiencies and higher purchase input cost is 1%. So 3% positive for price, 2% negative for cotton and 1% negative for manufacturing efficiencies are our numbers.

Eric Tracy - FBR Capital Markets & Co.

And then, as it relates to the elasticity and sort of the impact on unit volumes, are you able to quantify what is embedded within your assumptions?

Laurence Sellyn

No, it's not scientific. We don't have the ability to do this scientifically.

Glenn Chamandy

But what we've done is we've reduced what we think the expectations of growth in the market are for the balance of the year, which are significantly lower than what they were up until now. I mean, last quarter the market grew by 8%. The one thing I think I would add to this whole thing is that we're not just -- I mean, what we discussed in our last was a new paradigm because, although we've increased prices in our channel, roughly under 20%, let's say for example, for subsequent price increases, that amount is significantly lower than the increase cost of Asian imports. The price of T-shirts in Asia have gone up probably double since year October from the $15 range closer to the $23 range plus duty and shipping, for example. Those shirts are significantly more expensive. So what's driving our industry, and these are the pieces that we don't know, because definitely one would think that as you raise prices, elasticity would -- demand would be reduced. But the reality is that there's more and more opportunity as people migrate product -- production from Asia into this hemisphere. And I think that's what the big windfall is going to be for us again and people in our industry. So hopefully, we're going to see continued demand. We don't have a crystal ball again. So for conservative reasons, we're going to run full capacity. We're making every dozen we can. Our inventory levels at the end of last fiscal year were short by probably a good 3 million dozen where we want to be at the end of September. So we're pretty confident that we can run everything we could make. And the question will be, what will happen with the demand in the market. But based on where we are today, I would say, historically, when you look at the beginning of the year, we've never been off to such a good start. I mean, we've never had this much momentum in the beginning of the year in all the years we've been selling T-shirts. So things are heading into the right direction and we just hope they continue.

Eric Tracy - FBR Capital Markets & Co.

And maybe just follow on the Sock business. Again, it sounds like your efficiency's been causing you to miss out on some of the demand there. Can you speak to the pricing in terms of the quarter versus unit volume? This first, if you could touch on that.

Glenn Chamandy

For socks?

Eric Tracy - FBR Capital Markets & Co.

For socks.

Glenn Chamandy

Yes. Unit volumes were down about 5%. And then we gave the total dollar decline was about 9%.

Laurence Sellyn

That's a mixed year-over-year. Yes. Which the -- those are the difference between 5% and 9%. It's more a function of the change in the mix as we move towards the more basic lower volume manufacturing mix that fits with our manufacturing.

Glenn Chamandy

But as far as our whole Sock business in general, with the increases in prices that are effective in January, plus the modifications in products that we're making to enhance our margins, and in conjunction with the retailers, and subsequent price increases that are being worked on for back-to-school, and combine that with an acceleration of our relocation of our U.S. production facilities from -- through it and closing through it. Two of the plants will be closing next week and two more plants will be closing at the end of this quarter. And when everybody comes to the trip in Honduras in March, you'll see Rio Nance IV running at a pretty good clip and fully integrated. Just to remind you that we're still making 10 million dozens in the United States and every dozen that we produce in the States probably cost at least $1.50 a dozen more than our vertically integrated facilities in Honduras. So we have significant savings as well as cost of that product as well as our price increases. So we expect as we go forward into the back half of this year into next year that our margins will be in line with our business plan.

Eric Tracy - FBR Capital Markets & Co.

And then just lastly on Q2. On the gross margin. Again, I guess, it's a lower cotton cost that you now have embedded to 90 versus 95. Is there anything else going on there relative -- again, I know, pricing coming through as well. I was just thinking of sort of the disconnect between Q1 to Q2 to, sort of, significant ramp. Is it all pricing and then lower cotton to gets you there?

Laurence Sellyn

So we have a 2% improvement in gross margins between Q1 and Q2. The positive impact of the price increases should increase margins by 4%. The negative impact of higher cotton is 3%. So that's 1% favorable and the other 1% improvement comes from more favorable mix with the higher proportion of fleece and long-sleeve T-shirts in the second quarter compared with the first quarter.

Operator

And your next question comes from the line of Jessy Hayem with TD Securities.

Jessy Hayem - TD Newcrest Capital Inc.

Still on the subject of socks. Just wondering, I guess, with the inefficiencies you had, in terms of the service levels throughout the quarter, what has been the reaction of retailers? Any penalties related to this? I suppose you kind of -- this was reflected in some of the scorecards that retailers keep track of?

Glenn Chamandy

Well, we had, I'm not going to say penalties from retailers, but we pay freight to get our goods on time to some of the retailers. So, I'm not going to say penalties but more costs incurred to supply the product. Definitely, having shipping issues is not the greatest thing to have. But we worked through all these issues and we're back on track. One of the objectives for us right now is we're going to consolidate our U.S. production, but we also, at the same time, working today on significantly new opportunities that will continue our growth in socks as we go forward. So we're continuing -- very optimistic about landing new programs which hopefully in the next coming months we can tell you about. But at the end of the day, we're very comfortable with our positioning. It's not something that we -- it's great to have but that's part of life. And we're a major supplier to these retailers and it's a two-way street. So we think our relationships are strong enough to be able to support continued growth and the new opportunities. And we have quite a few in the burner right now.

Jessy Hayem - TD Newcrest Capital Inc.

And I guess it's safe to say that these orders are pretty much lost, nothing you can recoup in the quarter, right? In the current quarter?

Laurence Sellyn

Those are pretty well lost because of the fact that they're skewed to holiday. So I would say that they would be lost out of our forecast for this year.

Jessy Hayem - TD Newcrest Capital Inc.

And just on the ramp of the sock facilities, I mean, once Rio Nance IV is fully ramped up, you're going to be at 65 million dozen capacity which you're ramping up to 60 million dozens this year, if I remember correctly. So essentially you're folding that sort of 10 million dozen capacity that was still available in the U.S. into Rio Nance IV and V, right? III and IV, I should say.

Glenn Chamandy

Right. But, the thing is, what we're going to do is we're obviously going to ramp the plant up based on forward of those sales. So if our sales will support 55, that will be the number. So, I mean, I think where we're seeing our sales volume in socks year-over-year today is probably more flattish, I would say, is what we're looking to do this fiscal year, because our focus right now is to continue to reduce costs and increase our prices, do product changes and we're working on significant new programs but they're going to be in the back half of the year, that will really probably affect next year. So once we get the plant consolidated, we'll have the capacity to go to 60-plus million but will be somewhere between the 55, mid-50 range is probably in there this year just to support what our sales objectives are for this year.

Jessy Hayem - TD Newcrest Capital Inc.

And then the price increases at retail, did you actually -- would you care to share what percent price increase that would be? And, I believe, you mentioned they're effective January for both socks and underwear?

Glenn Chamandy

Yes. Well we said approximately 5% for January, and I prefer not to disclose the underwear ones at this point in time, because it's a little premature for us to do that but it will be significant.

Jessy Hayem - TD Newcrest Capital Inc.

Are you still on track to produce roughly 64 million dozens activewear underwear this year, which I guess, hypothetically, 4 million is going into inventory?

Glenn Chamandy

That's right. 64 million will be our in-year production and approximately 4-plus million will go to inventory.

Operator

And your next question comes from the line of Kenric Tyghe with Raymond James.

Kenric Tyghe - Raymond James Ltd.

I want you to provide a little more color with respect to the new programs you're referencing or other potential new programs in underwear, and specifically with regard to prior sensitivities, you mentioned, with your large mass-merchant retailer. I just like to know, sort of, how those are being positioned? And what the response has been in the channel such as it has?

Laurence Sellyn

I think you're referring to the sock program that I mentioned -- our sock program, the program that I mentioned as we went through the comments. And clearly, if we we're at a point where we're comfortable giving you specific details on that, we would have done it but, hopefully, we'll be in a position to do that soon.

Kenric Tyghe - Raymond James Ltd.

Just follow-up on cotton, I realize we've had quite a discussion on this. At 55% hedged on the fourth quarter, that appears to be a fairly conservative strategy on your part. Is that just a function of the dynamics you've laid out? Or is it one of your sort of remaining opportunistic in the market? Or something else we sort of missing by way of the dynamics in the broader cotton market?

Glenn Chamandy

What we said is that we're hedging to as we go through this volatility to try to mitigate exposure. Because we don't know what's going to happen to the price of cotton and it's moving relatively fast up and down. So based on the decisions we made, this is where we landed. And the assumption that's in our guidance now is that based on what's hedged at 55% plus the future price -- the current future price, that's what's landed in our guidance. So if the future price goes up even further from here, there could be some downside. As it comes down to future price, there could be some upside. But we feel that cotton is really a pretty well high-level now. I mean, it has peaked to $1.75 a pound for March. And there will be further hedge as we go through the next month or so. So that's where we are right now, and we feel comfortable where we landed. And if cotton stays at these levels, we would introduce additional price increases, and if it subsides, we'll just keep going at the level we're at now.

Kenric Tyghe - Raymond James Ltd.

I realized we'll get better visibility when we tour the facilities in March. But you mentioned that the build is progressing. I mean, any further commentary on the build , I mean, progressing is, obviously, expected at this point, but any further color you could provide around the build ?

Glenn Chamandy

Around the what?

Kenric Tyghe - Raymond James Ltd.

The facility expansion of both the...

Glenn Chamandy

Rio Nance V. We're running -- hopefully everybody will make our investor trip in March. Rio Nance V is a full stream ahead. The plan for us is to start production there in August. The knitting will start in August and the actual dying and finishing will be running in September and the plant will be ramped up through 2012. It's also going to be our biggest, most state-of-the-art facility, which will be great to see. So it's making great progress right now, the equipment's ordered, the building is up. I mean, it's moving forward.

Operator

And your next question comes from the line of Claude Proulx with BMO Capital Markets.

Claude Proulx - BMO Capital Markets Canada

When you look at 2011, you talk about cotton prices might being some downside. When you look at the upside, would you say it comes more from volume or pricing?

Glenn Chamandy

I don't think we think there's much downside in our cotton assumption. We've assumed that we fill the balance of our uncovered requirements at the current prices. So certainly no -- it's at least as likely that the cotton will come down from today's levels that go up. So I don't know if we position that as more of a downside risk than an upside.

Claude Proulx - BMO Capital Markets Canada

What would be the biggest source of upside, would you say it's pricing or volume?

Laurence Sellyn

I guess the first point, Claude, is that I do want to say our guidance is the entire guidance. But where the upside opportunity would be, that we've mentioned, are further selling price increase and further sales volumes because of the inventories that we're building at the end of the year. And hopefully the assumption was made that there will be a negative impact and demand of the higher prices will be a conservative risk assumption that won't actually materialize.

Claude Proulx - BMO Capital Markets Canada

So maybe be more volume than pricing?

The market was up 8% in the month of October, the quarter ending December. So their under that clip and there's continued strong demand. Obviously, that is an upside for us because we're building 4 million dozens of additional inventory that could be sold to the market. So that's really the unknown for us. I mean, we're being conservative but we think that we're being realistic in terms of where we're going. And I think that, that's where you should position yourself today. Unless, if the market -- and again, what I said before is that given the price increases, which we've obtained so far, if you look at 20% on an average price of, let's say it's about the $3.60 a dozen, for arguments sake, say for a T-shirt, where the prices of Bangladesh have gone up to duty-paid, probably closer to $12 a dozen. We are so far competitive that there is room to raise prices because I think people are going to continue to bring more products into this hemisphere. So that's the positive side. So I think that there's still room, but we don't want to do anything until we have to. And all of our price increases up until now have been based on $1.25 cotton. So that's where we feel comfortable with at this time, and that sort of where we position ourselves. So if the future price come down significantly, maybe we'll continue going at this clip. Where the future price is today, there'll definitely be a price increase some time in the back half of the year.

Operator

And your next question comes from the line of Spencer Churchill with Paradigm Capital.

Spencer Churchill - Westwind Partners

Just on the Charleston impact for Q1, and I was wondering if you might be able to quantify the revenue hit as well as the extra cost that you incurred in the quarter?

Laurence Sellyn

The extra cost was about $3 million. The impact on revenue is harder to quantify because there's an opportunity cost.

Glenn Chamandy

.

There was approximately 2 million dozens worth of product, saved a couple cents.

Spencer Churchill - Westwind Partners

And in terms of the price increase on the socks that you implemented in January, just in terms of the timing, should we expect to see that sort of getting impacted later in Q2, early Q3, like the activewear or should the timing -- could it be different?

Glenn Chamandy

You're talking about the retail price?

Spencer Churchill - Westwind Partners

Yes.

Glenn Chamandy

The retail price increase, the first one was in effect in January. So that goes in effect ASAP January 1. And then I said we're making some selected product changes between now, and let's say for example, probably will tell you more of an effect in Q3. And then we have another price increase that will come effect for back-to-school.

Spencer Churchill - Westwind Partners

And just in terms on the competitive front and how your competitors are reacting to the recent run of price increases, have you seen any attempts by some of your competitors to steal share by holding back or is everyone just kind of falling in line and doing price increases themselves?

Glenn Chamandy

The good news is from our competitor base is that we're all in the same boat, really. We're all trying to mitigate this exposure. I think that in general, it's not just in this hemisphere but the reality is that the whole world is short on cotton. One of the things you can do is you can actually check the on-call and see that most of the cotton that's been sold has not been covered. And that's one of the reasons why it's run up to these types of levels. So the good news is, is that we're all going to benefit too because the business is good, and business is coming from Asia and coming to our hemisphere, and it's strong for everybody. So I think everybody is seeing good sales. Not just ourselves, I think that some of the other -- our competitors have reported their sales were up as well as in our channel. So that's good for everybody. I think as an industry, I think the question is, is to mitigate through the volatility of cotton and continue to grow the business.

Spencer Churchill - Westwind Partners

Laurence, maybe if you could take us through the analysis you did last quarter in terms of the EPS adjustments for fiscal 2011 versus year end at fiscal 2010 in terms of what the EPS impact was for the cotton increase, the volume increase, and then sort of the negatives on the other side?

Laurence Sellyn

Going from last year to this year?

Spencer Churchill - Westwind Partners

Yes.

Laurence Sellyn

The full year. So the impact of favorable selling prices is now a little bit more than $1.50. Sales volumes are about $0.30. Higher cost cottons close to $1.70. Manufacturing efficiencies will contribute positively about $0.15 and SG&A expenses are negative $0.10.

Spencer Churchill - Westwind Partners

And then I think you mentioned before, product mix was negative $0.10 and higher taxes was negative $0.05. Any update on those numbers?

Laurence Sellyn

Say that again?

Spencer Churchill - Westwind Partners

Product mix was negative $0.10 and higher taxes was negative $0.05 I believe last time we've been through this.

Laurence Sellyn

Product mix will be negative $0.05 and higher taxes would be maybe a little less than $0.05.

Operator

And your next question comes from the line of Omar Saad with Credit Suisse.

Omar Saad - Crédit Suisse AG

You're the clear market leader, like you said, Glenn, everybody in the industry is experiencing the same phenomenon. Have you thought about pulling the price lever earlier a little bit more aggressively? It sounds like the competitor response is favorable. There are not really any kind of irrational competitors out there trying to -- willing to squeeze their own margin in order to take a little bit of share. Is there something from your customers' standpoint, with the wholesale distributors, are they price-resistant? Or the end market is price-resistant? Can you just help me understand how you think about the whole chain of events.

Glenn Chamandy

Well, like anything else, I mean, I think we were pretty aggressive, honestly. I mean, we're surprised how aggressive we were ourselves in terms of the last four price increases that we have obtained. But the reality is, is that our customers' customer has mixed commitments, they have programs. So you have to be careful and implement these price increases in a reasonable time in order to give people a chance to adapt and mix the adequate commitments. I think that, that's definitely one major factor. Also, we want to make sure that we don't have a total demand destruction because we've had full price increases in a very short period of time, and the last one, ink's not dry yet because it was just a couple of weeks ago, basically. So as we see, making sure that demand keeps going to where it's going and hopefully, it will, because I think that we're still very globally competitive even at the prices we're selling our products for today. And also, we want to make sure that cotton is going to continue to stay at these levels because it's not for sure that cotton does not overprice. There's definitely a lot of speculative people in the market today. And what's happening with cotton, when you look at it at $1.75 a pound, I can tell you that in most cases, people have a very hard time to -- and that's a global thing -- is to actually sell those products and bring them to markets. So I think that, that's going to force the price to continue to come down eventually. And so those factors, which we weigh in -- we don't want to be in a knee-jerk position so I think as long as we're methodical; we make sure that business is growing, we make sure our customers are really in the same direction as us and we make sure we have visibility in the market, at that point in time, we'll consider potential price increases if cotton stays where it is.

Spencer Churchill - Westwind Partners

Can you talk a little bit about some of the product modifications you're making in the socks that kind of helped on the margin side? And is that something that's coming from the customer? Is that kind of your own innovation?

Glenn Chamandy

Well, some customers are having a hard time and this is mainly in retail. I mean customers are having a hard time dealing with these types of price increases because obviously, they're significant. So in certain cases, they're looking to make product changes like content in the product; maybe more polyester, for example, which is less expensive today than cotton; lighter weights, things like that; half cushion instead of full cushion. So there's things that you can do to a sock and you can reduce the cost. And as part of that can be passed on to consumer, where you have to hit them with the price increase, as well as I think that the industry at a retail market will continue looking at pack sizes will change as we go forward. You get eight in a pack for a certain price, maybe get six in a pack for the same price, and then the retailer can make more money and the margin increase will grow accordingly. And also, maybe one point is that, that's no -- partly, our whole strategy is that we have the best quality stock in the industry so -- and even in our case, we can afford relative to what's out there in the market, take a little out of it as if you -- and all this is in conjunction with our customer, obviously. I mean, still be in par with most of the stocks in the marketplace today.

Omar Saad - Crédit Suisse AG

Just to affirm, I think I heard you say this already but in the last four price increases, I mean, based on the sales number you just put up and I think your comment, it doesn't seem like you're seeing demand elasticity yet.

Glenn Chamandy

No, we haven't seen it yet, and we're pretty optimistic. And the only thing that we don't really know, again, is how much of this new business coming back to this hemisphere. And I think that, that's really a part of what's driving the opportunity at hand. So I mean, we have a lot of new business coming back here. Asia is a total mess, there's hyperinflation everywhere. Labor costs have gone up. I mean, we have a flagship fashion final test [ph] which is going pretty good but we don't -- what the government states of inflation is, I think, for example, is in the 8% or 9%, and it's going significantly higher than that. So a lot of these countries, freights going to become more expensive. The yarn, part of what we discussed about yarn is not just the cost of fixing your yarn on the exchange, but there is the other component which is actually buying the cotton, which is the basis, and some of the Asian suppliers are paying $0.30 a pound just to have that cotton delivered to them. So on top of the $1.75 that's there today. So when you take all of this in account, and to give you a good example of that, you could buy a kilo of yarn like a single 30 count in last October, you were able to purchase that from India or Pakistan for $2.50 a kilo, and that with the quoting for this April is $7 a kilo. It's almost threefold in terms of what the cost of that yarn is. And that's reason why which reflects in their price of their cost of goods sold. So that's what's driving our demand right now. I mean, partly. And also the unreliability of these Asian suppliers, basically. Retailers and I think printers are looking to buy more product domestically. And even though we're in Central America, our supply chain is considered to be a domestic supply chain.

Mark Petrie

So retailers and printers, everybody who's been buying T-shirts in Asia over the last decade, trying to look back closer to home.

Glenn Chamandy

I think that's what's happening.

Operator

And your next question comes from the line of Candice Williams with Canaccord Genuity.

Candice Williams - Canaccord Genuity

I was hoping you could help me get my mind around how pricing dynamics would work on their way down in a situation where cotton prices fall quickly.

Glenn Chamandy

Well, typically, what happens -- and I think one of the reasons why we haven't stuck our neck out and gone long on cotton at these types of prices is because the fact is I think we have a pretty efficient supply chain and we're turning our inventory every three months so we have an inventory and we're going to have cotton in our supply chain, would be three months. Typically, what happens is that if cotton does start coming down now, we don't anticipate cotton coming down, crashing down unless there's a global meltdown like there was in 2008. We believe it's going to be a soft landing. Even with the acreage of next year, we think that cotton is going to be trading in the $0.90 to $1.20 range because it's going to take a couple of years for the ending inventories to refill themselves. So the only way that cotton would come down typically fast would be if there's a global crisis out there, for example, like there was in 2008. So we have now set our prices today to be roughly about $1.25 cotton. We estimate next year will trade between $0.90 to $1.20, that's the range that we think it's going to trade at. And based on that, we would not have to modify our prices. There could be, potentially, as the cotton gets flushed out the channel, maybe a little bit more promotional activity reflecting the new price of cotton, I think that sort of what would happen. But the same token, I think that there's still other -- even though cotton -- when cotton does start coming down to the normalized level of $1.80, $0.90 to $1.20, which is our projection maybe for 2011, it may come down even further in 2012 as this continued planting to replenish the inventories, which for sure is going to happen. As that transpires, I mean, other costs are going to curve because cotton has been a big run-up today but there's other costs that are running up throughout the world. In Asia, transportation, labor and other things. So I think that even cotton settles down next year, we'll be mitigating other costs going up the other way. Let's say, for example, that we'll probably keep pricing stability where it is. And maybe one last point is that even today, prices, when I started in this industry in 1993, I can tell you, we sold the white T-shirt for $30.68 a dozen, that's sort of like the market price. Today, we're still selling those shirts for $17 a dozen. So our pricing today compared to 15 years ago is still significantly lower. So we're very competitive in the industry and we're also very competitive relative to the rest of the world. So I'm not really concerned about that type of landing. I think it'll be relatively soft.

Candice Williams - Canaccord Genuity

I was just wondering if there's margin upside in the situation where even if it is over 10 years, cotton...

Glenn Chamandy

Yes, I think there will be. I mean, because we're not going to lower prices. I kind of [ph] sometime tell you that cotton trades between $0.90 to $1.20 next year, and we fixed our cotton prices and we're pricing at a $1.25 for cotton and say [ph] we're not going to change pricing . And I think that with our efficiencies and all the things we're doing with biomass and Rio Nance V and all the other types of cost initiatives, we're definitely going to try and improve our margins as we look forward next year.

Operator

And your next question comes from the line of David Glick with Buckingham Research Group.

David Glick - Buckingham Research

Laurence, I just wanted to clarify essentially your guidance. If we were to translate it down, the EPS is unchanged. Just how you're getting there on the gross margin line is different. I just want to make sure I'm interpreting that correctly.

Laurence Sellyn

There'll be no material change. The margins are the same. There'll be slightly increased the sales and there's no change in the dollar SG&A.

David Glick - Buckingham Research

And then on cotton, I think you said you're assuming $1.40 for your fiscal fourth quarter and that you're 55% hedged. And I'm looking at the July future at $1.68. So you must be -- the $0.55 must be significantly below $1.40 or you're counting on the price coming down. I just want to try to understand what the assumptions are embedded in that number.

Glenn Chamandy

It'll be bought, all of our cotton today at a $1.65. It would average $1.40. We bought the balance of the 45%.

Laurence Sellyn

Some of it was already bought at lower pricing so assuming the balance of today's pricing, it will average about $1.40.

David Glick - Buckingham Research

So some of that was even below or close to where you are for Q3.

Glenn Chamandy

Absolutely.

Operator

Your next question comes from the line of Tal Woolley with RBC Capital Markets.

Tal Woolley - RBC Capital Markets, LLC

I just wanted to talk a bit about the volume weakness. It seems like -- that you're seeing in the guidance for the back half of the year. It seems like you're primarily concerned about the screenprint business. If I'm sort of reading correctly, then at the end of the day, you'll have sold more retail this year than you have in the prior year, correct?

Glenn Chamandy

Yes. We're not concerned about the volume. We've been conservative in our estimates. Right now, our business has never been stronger. So if you ask me am I concerned about the volume today, the answer is I'm not concerned. Business has never been stronger. We've never been off to a better start in any single year in the company's history. The reality is, is that we just don't know the unknown. So what we've done is we projected a more modest growth in sales within the channel of just around 3% versus the 8% it's been running at as of December. The quarter ending December, the market was up 8%, and what we're saying is we're saying look at potentially because of the last price increase we just put through in January, could that be slowdown demand. So we're conservative in our guidance. We're producing still the same amount of dozens we've anticipated from the beginning which is 64 million. We're just putting a little bit more dozens in inventory. So potentially, if the market is as strong for the balance of the year like it was in December, then we'll sell more dozens and that will be upside for our forecast. We just don't know and that's the thing. So it's been too early for us to where -- it's two weeks from our last price increase so it's a little bit early to say how it's going, we just don't know. So as we go through the quarter and we start seeing the CREST report and reports coming out in terms of the market conditions, we'll have a better visibility and then we'll keep adjusting from there. But irrelevant of that, we'll continue producing full-out, full-blast 64 million dozens.

Tal Woolley - RBC Capital Markets, LLC

Just in terms of shuttering the U.S. capacity and ramping up Rio Nance IV, what are some of the sort of typical inefficiencies you can see sort of during that process? Like have you had any stuff happen in the past that we hope that you might avoid again or...

Glenn Chamandy

Well, part of our inefficiencies even in Q1 in retail were actually the fact that the factory wasn't ramped up completely. I mean, we have three other plants in a start-up phase. So we have negative efficiencies in our plant as we speak, which have been full through our P&L in Q1. So the quicker we expedite the move, the quicker we'll get our costs under control and get it similar to our normalized operating costs at Rio Nance III. So there are going to some couple of transitions, some extra training. A lot of that has happened already because we've been training people in anticipation of moving knitting and moving our packaging facilities there. So there's been a lot of training and that's a big bulk of the inefficiencies that we passed through in terms of our negative efficiencies at manufacturing in retail in Q1. There'll be some still flowing into Q2, which is in our guidance. But then as we get into obviously Q3 and four, we'll flush all those inefficiencies out and our margins will start to increase as well as combine that with additional price increases and the product enhancements.

Tal Woolley - RBC Capital Markets, LLC

Is there any concern about physical availability of cotton? I read a couple of articles questioning that maybe if demand's a little bit stronger towards the end of the year that depending on exactly when crops come off or in the fall, that there might be some issues just with physically, stuff being available. And I didn't know if that's something that you're concerned about whether that's a geographical issue or not.

Glenn Chamandy

Well that is the whole issue why cotton is where it is today. It's all but physical. So the theory is, is that there's not enough physical cotton. So people are buying their cotton early and forcing the price up because they need this physical cotton. And that's really the truth but the question is, is that's why you need to consider your positioning because at the end of the day, is this a premature new hoarding process of people hoarding cotton because they're worried about physical and ultimately having enough cotton to bridge the gap will bring cotton down significantly in a future date. So these are some of the issues you have to deal with when you're trying to mitigate the exposure. But the reality is, is that, that's what it is. Now, we've booked all of our physical cotton for our facilities basically, so we are covered for this fiscal year and have enough cotton to bridge for the next harvest crop ourselves.

Operator

And your next question comes from the line of Hugues Bourgeois with National Bank Financial.

Hugues Bourgeois - National Bank Financial, Inc.

Can you just maybe entertain us on the progress you're doing in Bangladesh in terms of capacity expansion and also the target markets?

Glenn Chamandy

Well, what we're doing in capacity expansion is we're running the facility. It's running well, it's on track with our projected volumes. We're actually increasing the capacity during this course of this year. We have a project. When we took over the factory, we made a list of items we're going to be investing roughly about $12 million more capital in that plant from our original investment. So we're going to have about a $25 million investment in total. That investment is going to take the capacity of the factory up above 5 million dozens of production which will mainly be up and running by the end of [indiscernible] by first quarter of next year. And those dozens are being used to support these international markets that we're focusing on. Our international sales are growing strong. Once again, I mean that's what, again, was driving our overall demand. Our strategy is we have four growth objectives: We're continuing to grow our U.S. distributor business and capitalize the recovery of the market. We're looking at international growth and as well, we're pursuing our retail opportunities. So all of these things together, we believe, are a formula to continue our success for the company. But also, not only continue with the build-up of Bangladesh, but as well as to bring on additional capacity in our Rio Nance V facility which is going to be the largest state-of-the-art facility in which Gildan operates.

Hugues Bourgeois - National Bank Financial, Inc.

And the investment you're doing in the new vortex fiber, is that being implemented currently? Or will it be done over the course of the year?

Glenn Chamandy

Well that project was geared to be during the course of the year. So that's a project that was back-ended. We have enough vortex right now with the first initial investment we made to support all of this year's sales. And that second investment was really geared to support next year.

Operator

And your next question comes from the line of Scott Rattee with Stonecap Securities.

Scott Rattee - Blackmont Capital

Just a question within the retail channel. Are you sort of seeing any evidence to the fact that as we've got the higher apparel prices coming through that, it's really sort of serving as a catalyst for consumers to sort of consider in or purchase private label brands more so than previously?

Glenn Chamandy

No, I would not say so. I mean, I think at the end of the day, consumers in the mass market in the United States have typically bought on price. I mean that's really the driving factor. And I think the big question is going to be can the consumer absorb this new price increases. I mean that elasticity piece there, I think, on retail is much more sensitive I think in certain cases. Now, what will happen, in my opinion, is that the retail units will probably end up coming down because people will trade to smaller pack sizes. So the only way the rings will continue, the pack rings, in other words, than sort of having an eight pack, they'll get a six pack that's the same ring. But ultimately, unit volume will shrink. And that's just a function of the amount of disposable income that people probably have to shop at these retailers. So I don't think it's going to make a big difference between being branded or versus private label. I think it's going to be the shell-shock of the price increases because I think everything is going to go up relatively. I mean, everybody's faced with the same type of cost pressures. So if a brand was selling for x and private was x, and then this x moved upward, it will be reduced in terms of the offering to the consumer.

Scott Rattee - Blackmont Capital

And you've mentioned a little bit earlier that you're in very good position, that the backlog is one of the highest you've sort of seen. I think you made a comment something similar to that when we finished the fourth quarter. Can you just sort of comment on whether or not the backlog has actually increased quarter-over-quarter or sort of give some color on how that is progressing?

Glenn Chamandy

I rather not say to be honest with you but I can tell you that we feel very comfortable, and I can tell you that we've never been off to a better start, either in Q1 or Q2 historically in the company. I think that's the point of reference. And we're very optimistic. We hope things continue as they are today. And we'll report in May, and we'll hopefully come back and say if the market achieved our expectations and that we still got this backlog that's enough, something to our objective.

Scott Rattee - Blackmont Capital

Just sort of confirmation. You've mentioned in the quarter that SG&A was 12.6%. I thought for the full year we were sort of looking for it to be running at about 10.5%. Is that still what you're targeting?

Laurence Sellyn

We're targeting a little below 10.5%. The reason why it's higher the first quarter is purely a function of seasonality. The first quarter is seasonally the lowest quarter of the year for T-shirts. So the SG&A as a percentage of sales is always higher in Q1.

Operator

And your next question comes from the line of Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

I'm interested in your view on the extent to which you think distributors are buying in advance of the anticipated price increases, what that means for inventory build in the channel and how you foresee that influencing the flow of business across the year.

Glenn Chamandy

Well, the reality is, is that the inventories in the channel at the end of December, our inventory, was about 52% of the share of the inventory. And our share of demand is about 60%. So we're very comfortable with our balance. So up until now, even the fact that we've shipped many dozens as we did in Q1. We're very comfortable with that inventory position. So business is strong. There is 8% growth in the quarter and we feel very comfortable where the inventories are today in the market. I don't think that the distributors are buying necessarily more than they need because their inventories would reflect that in the marketplace. But I think the distributors are buying and giving visibility, making sure that they do get delivery. And I think that's a little bit more of the case, let's say, for example, than buying in anticipation the price coming and going up. So I think that the balance is good. And I think we're anticipating that to be in-line even at the end of this quarter.

Laurence Sellyn

And I'll add one thing. Although we identified distributor replenishment factor in our analysis that was impacting the year-over-year growth in sales, a lot of that was the non-recurrance of the de-stocking that took place in the first quarter of last year. So inventories in the channel are still in good balance.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

And then when you look at your back orders understanding that back orders are on the books prior to the price increase, is the volume such that it carries you deep enough in your inventory that your cost of goods are going to be higher than the associated price on those sales?

Glenn Chamandy

What we do is -- yes and no. But what we do is if we -- rather than putting a price increase that's going to be out in the future, which is very difficult to say what order came at what time, and just because you changed the price effective at a named date and where you get orders, basically. If you're shipping them and they don't ship complete [ph] , you increase the price or don't increase the price, it is very complicated. So what we do is we basically increase the price right away. So any order that was in the system, we honor that back order, let's say for example, and get shipped under the old price. And only the new orders from that day of the price increase will get to effect that new price. So therefore, the margin on those back orders is obviously lower than it would be in the new orders effectively.

Operator

And your next question comes from the line of Mark Petrie with CIBC World Markets.

Mark Petrie

So just to clarify quickly. With your growth lagging the industry growth on the wholesale distributor channel in the U.S., I mean, is that strictly a function of the inventory and do you see that trend reversing? Or is that a matter partly of you guys sort of allocating product to different channels or geographies?

Glenn Chamandy

Well, we increased our shipment to distributors significantly in the quarter. It's a function of the demand and the 8% growth in the market, and the amount of inventory that we had to support it. And also, it's a little bit -- also the quality inventory because we're trying to catch up. Coming off of Q4, we could be out on certain SKUs that could affect our market share in this quarter. But I would say that as we get into February, in the March period, we should see our market share go back to more of a normalized level as we go forward. So it's more a function of not having the right SKUs. And sometimes in certain cases, we have the right amount of inventory but not the right SKUs or vice versa. So it's just a question of us being -- sort of with some kind of inventory basically that is a reflection of the losses this year.

Mark Petrie

And you've spoken in the past, anticipating consolidation on some of the smaller manufacturers and obviously, they're under a lot of pressure in the current environment. Have you seen much of that so far? And what kind of role do you guys think that you could be playing in that if any?

Glenn Chamandy

I can't really comment on that but I can tell you one thing is that the price of cotton is going to make a significant impact on the global supply chain because if you look at what the cost -- if you take a trailer of yarn, was selling for $35,000 six months ago, was selling for over $100,000 today. So smaller undercapitalized companies are going to have significant problems having to deal with the amount of working capital that's required to support their business on a going-forward basis. Even ourselves, we're projecting a significant use of working capital just reflective of taking cotton last year in our books of $0.70-plus. And if we end up this year with $1.40, you just do the math and basically it takes seven pounds per dozen, take the amount of dozens and take the difference in the price, it's a hundreds of millions of dollars. We're in a good financial position because we use our own cash but the reality, that's some major strain. And the second part of it is that the credit lines from the people that supply them are probably going to be tightened in the sense where how much credit do you want to give somebody. So that's also another issue. So I think overall, it's going to create for the smaller undercapitalized producers, it's going to be very difficult times for them. And that may be part of, also, what we can capitalize on, as well as which will be part of our opportunities, to create demand. And that's even within the U.S. market. I mean there's a lot of smaller manufacturers in the West Coast United States. There's a lot of small manufacturers in Central America that just can't afford to buy yarn at these prices, or they don't have the credit lines. And that demand theoretically should come, hopefully, in our way.

Operator

And your next question comes from the line of Anthony Zicha with Scotia Capital.

Anthony Zicha - Scotia Capital Inc.

Follow-up question relating to inventory levels. Glenn, do you believe that on the retail front, that some of the retailers have been pulling forward their purchases and building up some inventory? And do you think that the levels are in-line where they should be?

Glenn Chamandy

Well, I can't tell in general but I can say with our inventory levels in retail, it actually came down a little bit in January. So I would say that they're pretty well in balance. Like anything else, retailers -- the increases that we've taken in January is not worthwhile for a major retailer like Wal-Mart. They don't adjust their systems like that, basically. They work on so many weeks of supply and they keep the machine going, and so I would say that the inventory levels are normalized where we see them today.

Anthony Zicha - Scotia Capital Inc.

And do you think that there are some product shortages out there at some retailers in different items because of the cotton situation?

Glenn Chamandy

No, I don't think, today, there is necessarily shortages. I think that there's going to be disruptions to the supply chain in back-to-school in the fall with this type of prices because -- and not so much from, I would say, from North American producers but more from Asian producers. Because a lot of companies in Asia aren't vertical. They buy yarn and they produce their goods. And all of a sudden, they go and buy the yarn. The guy commits them to a price and doesn't honor the price. And then therefore, that vendor can't honor the contract to the retailer and all that is working out on [indiscernible] for example. So there's going to be some broken hearts for sure. But it's hard for me to say.

Anthony Zicha - Scotia Capital Inc.

Relating to European operations in particular in the U.K., can you give us an idea of your progress like year-over-year in terms of market share and what the competitive landscape is like?

Glenn Chamandy

Well, our business is very strong in Europe like it is everywhere else. We grew, I think the number was...

Laurence Sellyn

It's about 20%.

Glenn Chamandy

20%. And again, in Europe, we've been probably more capacity-restrained than we are in North America because it's further away. But we're working hard to make sure that -- as we allocate it proportionally, but it's definitely been more so capacity-restrained than even in the U.S., believe it or not. So even based on that, we'll still be able to grow at over 20%.

Anthony Zicha - Scotia Capital Inc.

And some of the production that will come from Bangladesh will be servicing the European market?

Glenn Chamandy

Yes, some of the production from Bangladesh is servicing basically our Asian hub as well as, partially, our European business on specific SKUs.

Operator

And ladies and gentlemen, this concludes all the time we have for questions today. I will now turn the call back to Sophie Argiriou for closing remarks.

Sophie Argiriou

Thank you. Just before ending the conference call, I would like to remind you that Gildan will be holding its annual shareholders meeting tomorrow at 11:00 a.m. Eastern Time in Montreal at the Centre Mont-Royal. We'll therefore, be available this evening for the next little while to take any follow-up questions. With that, I'd like to thank everyone for joining us and we look forward to talking to you again at our next earnings conference call. Thanks and have a good night.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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