Blog: Leonie BarrieDismal third quarter results

Leonie Barrie | 24 November 2008

In a week of dismal third quarter results from US retailers, beleaguered Gap Inc managed to surprise the market with a 3.4% rise in third quarter profit to $246m. Admittedly the income boost was achieved by cost cutting, higher margins and reduced inventory levels – rather than better sales – but it did also affirm its earnings guidance for the year.

The worry, however, is what will happen when the company has cut all the costs it possibly can? There is certainly no respite on the sales front, with total sales sliding 7.7% in the quarter; and same-store sales falling across its Gap, Banana Republic, Old Navy and International divisions.

Analysts say the retailer’s “rock solid” balance sheet and lack of financing concerns have put it in a better position than its competitors, but until it can reignite sales growth there must surely be concerns about its growth going forward.

Cost-cutting measures continue to take centre stage at T-shirt, underwear and sock maker Hanesbrands, which is to cut nearly 400 jobs and close its yarn production plant in China Grove, North Carolina. Around 210 of the jobs being axed are management and corporate roles, while 185 employees will lose their positions when the yarn plant shuts at the end of the year.

The move is part of longer term plans by Hanesbrands, which owns labels such as Champion, Wonderbra and Playtex, to consolidate production into fewer but bigger facilities in Asia. Since spinning off from Sara Lee in September 2006, it has shuttered at least 28 plants worldwide employing around 16,300 workers.

Job cuts are also looming at US apparel maker Warnaco Group, which is to axe 7% of its corporate staff in a bid to adapt to the difficult economic climate. In total, the streamlining will result in 45 positions being lost, but the company is also eyeing a US$40m reduction in expenses next year.

Over in the UK, discount fashion chain MK One has gone into administration for the second time this year after being buffeted by a combination of tough trading conditions and intense competition from cut-price rivals. The high street retailer, which operates 125 stores, employs around 1,400 full and part time staff will continue to operate while administrators try to find a buyer for the business.

On the trade front, new research suggests China accounted for 42.8% of US apparel imports by volume in September – their highest ever level. Furthermore, this growth has accelerated since March, when Chinese imports reached a mere 20% of US clothing imports. The research believes American buyers returned to China after rising input prices and pay hikes had less of an impact on clothes prices than had been feared.

 


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