In the money: Hanesbrands sees lingering apparel price inflation
While still-high cotton costs weighed on first quarter profit at sock, T-shirt and underwear maker Hanesbrands Inc, the company still managed to beat forecasts and says it believes the worst of the cotton price inflation is now over.
"We have very good visibility for the remainder of the year for both price and costs," CEO Richard Noll said during a conference call with analysts earlier this week. "Cotton costs are locked through December. And we've confirmed pricing with our retailers for over 95% of our expected US volume."
That said, executives warn that while prices for summer and autumn are being "adjusted down" to reflect a fall in cotton costs - which are now sitting at just below $1 per pound compared with $2.10 per pound a year ago - "we don't want to leave anybody with the impression that prices are coming down a lot."
They point out that the price of polyester has gone up by 74%, wages over the last couple of years have climbed anywhere from 20% to 90%, and fuel costs are up 160%.
And "even for today's low price of cotton you're still talking about price increases versus 12 or 18 months ago that are 25% higher, Noll adds.
The company, whose brands include Hanes, Playtex, and Champion, said losses in the three months to 31 March came in at $26.8m, and although this was less than expected, it compares with a profit of US$48.1m a year earlier. Sales were down 3% to $1bn.
Higher cotton costs saw prices in core categories like underwear and panties rise by more than 20%, although these "continue to perform well with both retail sales growth and our shipments being at or above our plans."
But margins were also hurt by moves to refocus on branded imagewear product categories, falling Just My Size sales, and $13m in expenses to adjust capacities across the supply chain.
As part of its response to higher cotton costs, Hanesbrands raised prices three times in the course of its last financial year, and changed some pack sizes. It also reiterated that the move helped drive comp sales and profitability at its retail customers.
"The pricing strategies and tactics that we have implemented are meeting or exceeding both our expectations and those of our customers," confirmed co-chief operating officer Bill Nictakis.
"Price gaps now appear to be moving within our historical ranges, and our customers acknowledge and are pleased with the positive impact that category prices have had on their business."
He added that the "biggest positive" in the first quarter is "how we and the entire retail community have managed pricing. Up until the dramatic cotton inflation of 15 months ago, the majority of the apparel world was stuck in a cycle of deflation. This was difficult for suppliers and difficult for retailers.
"As the price of cotton doubled and then tripled, we all had to burst through the traditional apparel pricing paradigm and raise prices. And our retailers learned that some level of price increases can work to their advantage.
"I think this change in perception with regards to price has an ongoing benefit to our retailers, as well as to companies such as ours who have strong brands, quality and innovation."
New products have also contributed to mid-single digit sales gains in men's underwear, and high-teen gains in women's panties. This includes the synthetic cotton blended ComfortBlend men's underwear.
Looking ahead, Hanesbrands reaffirmed its full-year outlook for earnings of $2.50 to $2.60 per share and a revenue increase of 2-4%. It also said operating margins for the rest of the year should return to a more normal average of around 11%.
But Noll also endorsed wider industry comments that the move towards lower cost sourcing countries is "now over," and that inflation across the supply chain is here to stay. "There's not a lot of other low cost countries that have a billion people in them like China has."
Higher wages, fuel and polyester are "going to continually work their way through on a more consistent basis. You'll always have the fluctuations with cotton up and down. But you're going to see those other things go up and they tend to be relatively sticky."
He adds that as well as rising retail costs, apparel price inflation over the next decade is likely to be on the order of 3-5%. "That bodes well for companies that have brands, because they've got more pricing power than those that don't."
Unless you've been living on Mars or have been trapped under something heavy for the past year or so, you won't need telling about the cotton price hikes of recent times....
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