A cotton field
Scott Olson | Getty Images
The last time cotton prices were so high was in July 2011.
“In 2011, we need a prayer meeting,” Levi Strauss CEO Chipberg told investors on Wednesday’s earnings call.
Bergh recalled that he had just joined the denim retailer and was learning how to handle Levi’s business. But he also stared at the historic spike in cotton prices. As demand for textiles rebounded from the global financial crisis, cotton prices soared to more than US$2 per pound, and major cotton exporter India is restricting shipments to help its domestic partners.
Jack Kleinhenz, chief economist of the American Retail Federation, said that the average price of cotton T-shirts rose by about $1.50 to $2. Consumers feel the impact. It also erodes the company’s profits.
Berg stands in the same camp as analysts and experts, and they say that the current cotton price inflation is less harmful to the industry. Manufacturers and retailers have pricing power. Companies will be able to pass on higher costs without disrupting consumer demand.
“The situation today is very different,” Berg explained. “In the past 12 months, we have been able to set prices, and they have remained the same…. We set prices before some inflationary pressures hit us.”
Cotton prices soared to a 10-year high on Friday, reaching $1.16 per pound, touching their lowest level since July 7, 2011. Commodity prices have risen by about 6% this week and are up 47% so far this year. Analysts pointed out that traders are eager to cover short positions, further exacerbating earnings.
The rise is due to a variety of factors. In December of last year, the Trump administration prevented American companies from importing cotton and other cotton products originating from the Xinjiang region of western China because of concerns that these products were produced by Uyghur forced labor. The ruling has been in effect during the Biden administration and is now forcing Chinese companies to buy cotton from the United States, use the cotton to make goods in China, and then sell it back to the United States.
Extreme weather, including droughts and heat waves, also destroyed the cotton crop in the United States, which is the world’s largest exporter of commodities. In India, insufficient monsoon rains may damage the country’s cotton production.
This dynamic has put pressure on the stocks of Hanes Brands, a clothing manufacturer known for underwear and cotton T-shirts. Historically, HanesBrands’ stock price will fall as the price of cotton rises. The stock has fallen 7% in the past week. On Friday alone, the stock price fell 5% to close at 16.23 US dollars.
“True Pricing Power”
Credit Suisse analyst Michael Binetti said he believes that any concerns or pullbacks in retail inventories due to rising cotton prices are exaggerations.
He said that only 2% of HanesBrands’ cost of sales comes from directly purchasing cotton. As early as 2012, this number was even higher, at 6%.
Binetti said that following the rise in cotton prices in 2011, HanesBrands increased the prices of various cotton products by double digits three times before 2012 to offset inflation. HanesBrands’ profits are still shrinking due to all the costs it faces. But in the end, the company maintained some price increases. Credit Suisse analysts said it is now in a healthier state with higher profit margins.
“We think stocks underestimate the most powerful momentum the industry has never had in more than a decade. Real pricing power,” Binetti said.
Retailers have obtained this pricing power by actively avoiding discount channels and eliminating excess inventory. The Covid pandemic has become a “cover” for companies to accelerate this transformation. Continued supply chain bottlenecks have also played a role in tightening inventories. This dynamic has greatly increased costs, companies are raising prices, and consumers are still buying.
“We believe that inventory will remain reasonable, profit margins will remain strong, and retailers will be able to drive larger and more stable price increases than they have been in more than a decade,” Binetti said. He expects cotton inflation to be temporary.
UBS analyst Robert Samuels said he expects the retailers that will be hit hardest by rising commodity prices are those specializing in denim. Cotton accounts for more than 90% of the raw materials used to make jeans and other denim products.
“It’s as if retailers don’t have enough things to worry about supply chain constraints and labor shortages,” Samuel said in a report to customers.
More severe spikes
But Levi has tried to dispel any concerns about its denim business.
In its earnings conference call, Levi stated that it has negotiated the cost of most products in the first half of next year, and the inflation rate is very low. In the second half of this year, it is expected to experience mid-single-digit growth. Levy said it plans to offset the rate hike through the pricing actions it has already taken.
Levi has been transforming its business from a wholesale-oriented business to a hybrid business that accounts for an increasing share of direct-to-consumer sales. With strong consumer demand and tight inventory, it can sell more products at full prices.
Chief Financial Officer Harmit Singh said that cotton accounts for about 20% of the cost of making a pair of Levi’s jeans, and each pair of jeans contains about 2 pounds of cotton.
Due to the timing of its earnings conference call, Levi was one of the first clothing retailers to publicly comment on the soaring cotton price. Others will report third-quarter results in the coming weeks.
According to Goldman Sachs analysts, considering the timing of contract cotton purchases, it will take some time for the rising cotton costs to even begin to appear in the retailer’s income statement. It is worth noting that in 2011, the price of cotton soared to more than US$2 per pound, which was much higher than today’s commodity transaction prices.
However, as prices continue to rise, apparel stocks may face some pressure. For example, analysts tagged companies such as Ralph Lauren, Gap Inc., Kontoor Brands, and Calvin Klein owner PVH. Shares of Kontoor Brands, which owns Wrangler and Lee jeans, fell nearly 6% last week, while PVH, Gap and Ralph Lauren all closed down less than 2% this week.
If you want to know more about business please go to https://updatednews24.com/category/business/