spot_img

Cotton-Price Decline Could Cushion Apparel Margins

Date:

Share post:

Rising cotton and freight costs didn’t unravel the apparel industry on the way up. The reversal of those costs could help pad their margins on the way down next year. 

Cotton prices, which surged through 2021 and reached an 11-year high in May of this year, have been on a steady decline and are now 47% below that peak. Unfavorable weather—severe flooding in Pakistan and drought in the U.S.—badly hit cotton-harvest forecasts this year, helping push cotton prices up initially. But a worsening consumption outlook has pulled prices back down. In the nine months through September, China’s cotton yarn imports, which the U.S. Agriculture Department views as a bellwether for global cotton-consumption growth, have fallen by nearly half from the same period a year earlier. Meanwhile, ocean shipping rates from East Asia to the U.S. West Coast were down 87% in the week ended Nov. 27 compared with a year earlier, according to data compiled by Goldman Sachs.

Apparel companies managed costs well on the way up, partly because supply-chain snags last year—worsened by factory shutdowns in Vietnam—meant lower inventory across the board. That, and a healthy consumer with an appetite for dressier clothes, made it easy for clothing brands to raise their prices, more than offsetting higher cotton and freight costs. But they face a lot of uncertainty next year as inflation continues to shift consumers’ spending priorities away from discretionary purchases.

Clothing brands are counting on those easing costs to help pad margins starting next year. Cotton comprises roughly 10% to 20% of the cost of goods sold for

Levi Strauss,

North Face-owner

VF Corp.

and Michael Kors-parent

Capri Holdings,

according to a research note from equity analyst

Omar Saad

at Evercore.

Gap,

American Eagle Outfitters,

Abercrombie & Fitch,

Ralph Lauren,

Children’s Place

and

Hanesbrands

all called out a decline in cotton prices in their most recent earnings calls. Both

Gap

and Abercrombie & Fitch said they would begin to see benefits of lower cotton prices starting in the second half of next year, lagging behind the movement of cotton prices somewhat because companies tend to make cotton purchases in advance. 

Sharply declining cotton prices following the early 2011 price surge helped clothing makers recover margins. Gross margins at American Eagle Outfitters and Gap declined 3.4 percentage points and 3.8 percentage points, respectively, in 2011. When cotton prices came back down to earth in 2012, Gap recovered most of its margins while American Eagle Outfitters regained the decline and then some.

The margin-cushion assumption could still come undone next year. China, which is both a key manufacturer of clothes and a consumer of them, looks to be easing its lockdown policy. That could move cotton prices up again, according to

Jack Scoville,

market analyst at Price Futures Group. Secondly, if consumer demand fades next year, apparel companies could be tempted to discount heavily, giving up their price gains. Clothing prices are already on their way down: Apparel inflation in October moderated to 4.1% from a year earlier, down from a peak of 6.8% in March, according to the U.S. Bureau of Labor Statistics. 

Input costs are moving in the right direction today, but that is no guarantee of a soft landing for all apparel sellers.

Write to Jinjoo Lee at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here

spot_img
spot_img

Related articles

Is It Normal To Be Unhappy In A Relationship Sometimes?

Kelly Gonsalves Now, none of this is to say unhappiness in a relationship should be an...

5 Ways to Speed Up Your Windows PC in 5 Minutes or Less

Jason Fitzpatrick Everybody loves a quick fix and, thankfully, a lot of simple Windows optimizations are...

Pantone 2023 Color Of The Year: 33 Viva Magenta Outfits, Beauty Products, Accessories, and Home Finds – E! Online

We independently selected these deals and products because we love them, and we think you...

CBDT Cir No. 24/2022: Covid Treatment Not Perquisite, No TDS Deduction

Arpit Kulshrestha <!-- --> The Central Board of Direct...
spot_img