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Outlook Good For US Apparel, Says Moody’s

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alling cotton prices and steady demand should help make the US apparel industry a winner in 2012, according to Moody’s Investors Service. Yesterday the agency raised its outlook for the industry to positive from stable.

The agency said that cotton prices have fallen by 62% since March 2011, which is anticipated to boost gross margins by one to two percentage points, on a quarterly basis. Overall operating income increases are expected to average 7 percent to 8 percent.

Companies that manufacture and sell cotton intensive goods and market them at moderate prices stand to gain the most, according to the ratings agency. Examples of such companies include Levi Strauss & Co., or children’s retailer Gymboree Corp.

The firm believes companies will maintain stable prices despite falling inputs in order to capture as much additional benefit as possible. This is feasible due to steady growth in US demand, as the recovery continues to gain steam. Federal Reserve Chair Ben Bernanke estimates a 2012 US growth rate of approximately 3%.

Cotton prices have fallen largely due to market effects. When prices spiked in 2011, farmers began planting more cotton, which increased supplies. In addition, producers and manufacturers began switching to synthetic materials, which reduced demand. Now, producers are reaping the benefits.
For companies with strong exposure in Europe, the ongoing crisis is expected to cut away some of the benefits of lower prices. Demand for apparel in Europe remains flat, as economic growth in the region stagnates. In addition, rising labor costs in China and the expense of transitioning from one-country to regional sourcing will complicate the profit picture. Also cotton prices are again rising as demand in China continues to strengthen, according to a statement by Weiquao Textile. These complications, and the global nature of the apparel supply chain, raise the prospect that Moody’s assessment of US apparel markets may be a bit narrow.

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