Blog: Leonie BarrieCotton conundrum continues...

Leonie Barrie | 25 October 2010

Apparel giant VF Corp last week raised its full-year earnings and revenue outlooks after booking an 11% rise in third quarter profit - and said it expects to sustain "near record" gross margins next year, despite rising cotton prices and labour costs in China.

The company, which owns brands such as Wrangler, Lee, Vans and The North Face, said net income rose to $242.8m in the three months to 30 September, while revenues climbed 7% to $2.23bn.

Speaking to analysts, chairman and CEO Eric Wiseman noted: "We believe we're competitively advantaged to weather [product cost inflation] better than most. It's true the cotton crisis is likely to be at a higher level than we envisioned...[but] as result of favourable negotiations in Asian sourcing costs across VF, we're coming in lower than we previously thought."

The company did not quantify the likely rise in prices, but says it intends to use all of its brands and countries and products to address the issue.

Hit by soaring raw material costs and rising wages in Asia, UK clothing and footwear prices in September 2010 were up on an annual basis for the first time since 1992. Although the increase was only 0.9% compared with the same month a year earlier, it has come at a time of faltering economic growth, fears of a double dip recession and impending rises in unemployment as a result of cuts in UK government spending.

The main cause of rising prices is a massive hike in the cost of raw cotton. But cotton prices are expected to continue to rise despite experiencing huge volatility on US exchanges.

On top of the increases in raw material costs, many mills in low cost countries are facing higher wages and labour shortages. As the relationship between low labour rates and low garment cost is now coming to an end, apparel firms must tackle the need for a well-trained, highly motivated and stable workforce.

Another change likely to affect European retailers and importers are new EU laws that would require a range of products - including imported clothing and footwear - to be labelled with their country of origin. The move was approved by the European Parliament last week, but needs to be backed by the international trade committee to come into force. The proposed law is intended to protect EU manufacturers from cheaper third country imports and allow consumers to make informed choices, but critics say it is protectionist, unnecessary and creates additional costs.

And finally, Jochen Zeitz, the CEO of European sporting-goods maker Puma AG, is to take on the role of executive chairman under changes that will also see the company become a core brand in a new sport and lifestyle division being set up by parent PPR. As well as taking on this new role, Zeitz will manage PPR's new sustainable development policy.


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