Gildan sees high cotton costs for another two years
Despite a recent retreat in the price of cotton, T-shirt and sock maker Gildan Activewear Inc has warned it could take another two years before prices return to more normal levels.
"At the end of the day, the reality is that cotton will remain high into next year," Gildan president and chief executive officer Glenn Chamandy said on a conference call to discuss the firm's record second-quarter results earlier this week.
"It may take into 2013 before we start seeing it come down to more normalised levels," he continued, adding: "And the new normal may not be Gildan normal."
According to the International Cotton Advisory Committee (ICAC), cotton prices fell in April for the first time in seven months, thanks to a slowdown in demand and a switch to man-made fibres.
But while the inter-governmental group said cotton prices dropped from a record of $2.44/lb on 8 March to $1.73/lb on 28 April, it agrees that prices continue to remain very high by historical standards.
Indeed, the Cotlook A Index is expected to average around $1.65/lb in 2010/11, and the season-average in 2011/12 is likely to remain significantly higher than the $0.60/lb average during the last decade.
Gildan has already lifted the price of products in the retail channel by around 5% to offset rising input costs, and on the wholesale front prices have soared 26% in the last nine months.
But as Chamandy points out, at around $1.75 the average price of a T-shirt is still one-third lower now than it was in 1993. "We're still, as an industry, very competitively priced."
Gildan also points out that even if cotton prices do continue to trend down, other inflationary factors - like labour, transport and power - also have to be taken into account. Which means it's too early to say whether the recent respite in cotton prices will be passed on to the consumer.
"I think that the other cost inflation that we're going to be incurring is going to be quite substantial in the future," Chamandy told analysts, adding that this is likely to offset any fall in cotton prices.
Indeed, the Montreal, Canada-based company has "quite a large price increase [in sock and underwear retail prices] going through in August" to cover costs in the second half of the year. It hopes it will be able to pass higher selling prices on to consumers without affecting demand by is pack sizes, for example.
"Instead of selling ten, you sell one less in the package so the volume will be maintained and that's how you pass along the selling prices to the consumers," Chamandy explained.
"And we'll evaluate as we go forward depending on what happens with the price of cotton over the next four weeks. There could even be potential further increases even in the holiday of October."
That said, the company remains bullish about its prospects for the fiscal year as a whole. After posting a 29.1% hike in second quarter profit to US$64.3m, thanks to a double-digit sales Gildan said it sees full-year sales in the region of $1.8bn, with earnings per share of around $2.00-2.10.
This forecast comes despite an expected third quarter hit from cotton costs of around $1.25/lb, compared with $0.85/lb in the second quarter. But the balance of its cotton cost for consumption in the second half of the year has been fixed at around $1.15/lb it said.
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