Note: Are you an independent apparel consultant? Are you a local independent apparel retailer? Then it is time you inform yourself (or allow me to inform you) on what the Independent Enterprise Network can do for you after you view the video. The bold blue highlights are my additions. This article by Kelly Evans appeared in the Wall Street Journal. gt
That may seem at odds with the strength of this year's holiday sales season. But supply constraints, rising production costs and choppy consumer demand suggest it will be trickier than Wall Street currently expects for many companies to increase profit margins in 2011.
Consider sportswear giant Nike Inc. whose third-quarter results last week beat profit and revenue estimates. Despite this, its shares fell after the company warned of "strong gross-margin head winds for the next few quarters." Nike put the pressure down to higher labor, cotton and transportation costs, plus the recent strengthening of the U.S. dollar. Those aren't concerns unique to the sportswear giant; they are shared across the apparel industry. Rapid development in China, the "workshop of the world," is now pushing up global production costs, reversing a decadeslong trend.
To make matters worse, companies' typical response—raising prices—is proving rather difficult at the moment. The average selling price of apparel in the U.S. has actually fallen for 10 of the last 11 months, according to Piper Jaffray, even though the cost of imported apparel per unit is up about 1.5% year-on-year.
The profit squeeze will likely worsen as the year progresses due to the long lag between merchandise orders and their arrival in stores. The run-up in cotton prices is a particular nuisance and is just starting to feed through the supply chain. Short supply plus strong Asian demand has more than doubled prices from the mid-70 cents per pound range seen this past summer to nearly $1.60 now for March delivery.
As a result, 2011 estimates for many apparel makers "to me are too aggressive from a margins and earnings perspective," says FBR Capital Markets analyst Eric Tracy. Nike at least can use its strong brand and global heft as a bargaining chip with suppliers. This may also make it better able to raise prices for customers. Smaller companies like Gildan Activewear Inc., Quiksilver Inc. and Volcom Inc. probably won't be as fortunate.
Apparel executives were hoping these cost pressures would prove fleeting. Now, following in Nike's footsteps, more will probably have to let investors know they are in for a tough slog.