Glenn Chamandy, Gildan Activewears president and CEO

Glenn Chamandy, Gildan Activewear's president and CEO

While a stellar fourth quarter and full-year performance at Gildan Activewear Inc was overshadowed by its warning that higher cotton costs in the year ahead are likely to eat into margins, the T-shirt and sock maker is confident it is well-positioned to weather the “new paradigm” taking place in global manufacturing.

Outlining its plans to lift product prices by around 5% in the retail channel in early 2011 to offset rising input costs, president and CEO Glenn Chamandy told analysts that production costs, are “on the rise everywhere,” but especially in Asia. 

“The global environment in our industry is one of supply shortages and hyper-inflation and raw material and other cost inputs, which is significantly impacting manufacturing and sourcing in Asia. The cost in Asia has skyrocketed. T-shirt prices in Asia have gone up over $9 a dozen since last year this time. They’re just not competitive.”

Chinese prices in all categories, not just basic T-shirts, “are up anywhere between 15% and 25%,” he says. And this, in turn, has led to retailers scrambling to find product – and should benefit companies like Gildan that manufacture in the western hemisphere.

“We think [there] is going to be a big shift in terms of where people are looking to manufacture in source of products,” Chamandy explains.

“When you look at the global paradigm, they’re faced with transportation cost, labour cost, everywhere there’s a huge amount of hyperinflation, which is going to create instability in the market. And we think it is going to allow for this hemisphere to be very good in terms of going forward into at least the next 12 to 24 months.”

Delivery issues
He also warns that fluctuating raw material prices will lead to a lot of manufacturers going out of business because they don’t have the capital credit lines to support rising raw material costs. And that as a result, retailers should brace themselves for delivery issues in the year ahead.

Gildan's investments over the past decade have focused on large scale vertical manufacturing facilities in Central America and the Caribbean Basin.

And Chamandy believes this has positioned the firm “as a reliable supplier of quality products to service large, continuous replenishment programs in North America, for both wholesale screenprint distributors and mass retailers.”

Q4 earnings hike
A recovery in retail demand and higher sales into the screenprint market helped the Montreal-based company to a 34% hike in fourth quarter earnings of US$56.8m. And full-year profit more than doubled to $198.2m as sales rose 26.3% to $1.3bn.

But while first quarter sales are set to be around 40% higher than the year before at $300m, gross margins are likely to fall to 25% from 29.8% a year earlier as a result of higher cotton and other input costs, Gildan said last week.

Efforts to reduce manufacturing costs over the next year include investments of more than $150m to expand its activewear and underwear capacity in Honduras, the Dominican Republic and Bangladesh, and ramp-up its second sock manufacturing facility in Honduras.

Once complete, total annual activewear and underwear capacity in Central America, the Caribbean Basin and Bangladesh will be around 90m dozen. Sock capacity will rise to 60m dozen.

Yarn savings
As well as expanding capacity, Gildan says it has worked with its yarn suppliers to replace expensive imported ring-spun yarns with those produced using a new technology which gives the same handle and quality but at a much lower cost.

The new yarns will be used in both T-shirts and underwear items. And as well as manufacturing cost efficiencies will generate duty savings too because, unlike imported yarns, they qualify for duty-free access into the US under CAFTA.

While Gildan has already contracted all of its first-half and some of its full-year cotton needs, the company believes there is still room to raise prices without affecting demand.

“There’s definitely room for price increases if cotton remains at the level it is now, and I personally think that the market can absorb it,” Chamandy explains. “But we need to be cautious and make sure that we don’t knee-jerk and raise pricing too fast to scare people away from buying our products.”