Meaning for retailers and shoppers

Texas News Today

cotton cultivation

Scott Olson | Getty Images

The last time cotton prices were so high was in July 2011.

“We needed a prayer meeting in 2011,” Levi Strauss CEO Chipberg told investors in a financial announcement Wednesday.

Berg recalled that he had just joined a denim retailer and was learning about Levi’s business. But he was also looking at the historic rise in cotton prices. As demand for textiles recovered from the global financial crisis, cotton rose above $2 a pound. Meanwhile, India, a major cotton exporter, has restricted shipments to support cohabitants.

According to Jack Clingants, chief economist of the National Retail Federation, the price of cotton T-shirts has risen from about $1.50 to $2 on average. Its effect was felt by the consumers. And it also sank into corporate profits.

Berg sits down with analysts and experts in the camp who say the current cotton price inflation does less harm to the industry. Manufacturers and retailers have pricing power. Enterprises can pass on higher costs without compromising consumer demand.

“Today is a very different situation,” Berg explained. “We’ve been able to price pricing for the past 12 months, but it’s been strong … we’ve priced ahead of some of these inflationary pressures.”

Cotton prices hit a 10-year high on Friday, hitting $1.16 a pound, a rate not seen since July 7, 2011. Commodity prices are up almost 6% this week and are up 47% so far. Analysts say profits have strengthened further as traders rush to cover short positions.

The run-up comes from several factors. In December last year, the Trump administration imported cotton and other cotton products produced in China’s Xinjiang Uyghur Autonomous Region, fearing it was produced by Uighur ethnic groups using forced labor. I stopped it. Decisions that persisted during the Biden administration forced Chinese companies to buy cotton from the United States, use the cotton to make goods in China, and sell it back to the United States.

Extreme weather events such as drought and heat waves have also wiped out cotton throughout the United States, the world’s largest commodity exporter. In India, inadequate monsoon rainfall can harm the country’s cotton production.

Dynamic is already putting pressure on the stock of Hanesbrands, an apparel maker known for its underwear and cotton T-shirts. Historically, Hanesbrands’ stock price has fallen due to rising cotton prices. Stock prices fell 7% last week. On Friday alone, the stock had closed 5 per cent lower at $16.23.

“Real Pricing Power”

Credit Suisse analyst Michael Vinetti said he exaggerated the shortfalls from concerns about retail stocks and rising cotton prices.

He said only 2% of Hanesbrands’ cost of goods sold comes from direct purchases of cotton. In 2012, that number was as high as 6%.

Vinetti said that after increasing cotton prices in 2011, Heinesbrands raised prices for various cotton products three times by 2012 to offset inflation. Hanesbrands’ profits still fell short of all the costs it faced. But in the end, the company retained some of those price hikes. According to analysts at Credit Suisse, today they are in high profit margins and in a healthy position.

“I think equities underestimate the sector’s strongest dynamics in more than a decade,” Vinetti said. “True pricing power.”

Retailers are aggressively demonstrating their pricing power by moving away from discount channels and removing excess inventory. The COVID pandemic acted as a “cover” for businesses to accelerate this change. Ongoing supply chain constraints have also played a part in consolidating inventory. This dynamic has driven up costs significantly, companies have raised prices, and consumers are still buying.

“We believe inventory remains reasonable, profit margins remain strong, and retailers can continue to push for more consistent price increases than they have been in more than a decade.” Vinetti said. He expects cotton inflation to be temporary.

UBS analyst Robert Samuels said the retailers who are expected to suffer the most from rising commodity prices are those that specialize in denim. Cotton makes up more than 90% of the raw material used in jeans and other denim products.

“As if retailers don’t have enough to worry about supply chain bottlenecks and labor shortages,” Samuels said in a note to customers.

more severe spikes

However, Levi’s is already trying to ease concerns about the denim business.

Levy said in a statement in its earnings announcement that they had already negotiated most product costs with very low single-digit inflation through the first half of next year. Mid-single digit growth is expected in the second half of the year. Levy said it plans to offset the increase with pricing actions already taken.

Levi’s is shifting its business from predominantly wholesale to a mixed basis with an increasing share of direct sales. In addition, strong consumer demand and tight inventory have allowed us to sell more products at regular prices.

About 20% of the cost of making Levi’s jeans is made from cotton, and according to Chief Financial Officer Harmeet Singh, each pair of jeans contains about 2 pounds of cotton.

Levi’s was one of the first apparel retailers to publicly comment on the hike in cotton prices due to the timing of the revenue call. Others will report Q3 results in the coming weeks.

Analysts at Goldman Sachs say it will take some time for the increase in cotton cost to be reflected on the income statement of retailers given the timing of contract purchases of cotton. It is also worth noting that cotton prices climbed above $2 a pound in 2011. This is far beyond the place where goods are currently traded.

Still, apparel stocks may face some pressure as prices continue to rise. As an example, analysts have flagged companies such as Ralph Lauren, Gap Inc., Contour Brands and PVH, the owner of Calvin Klein. Contour Brands, which owns Wrangler and Lea Jeans, fell nearly 6% last week, while PVH, Gap and Ralph Lauren each lost less than 2%.

-CNBC Michael Bloom contributed to this report.

LEAVE A REPLY

Please enter your comment!
Please enter your name here