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How Macy’s, Columbia, Unifi and More Tackle Raw Material Pricing Pressures

Companies along the supply chain haven’t been standing idly by as tariffs on Chinese goods, fluctuating raw materials costs and general uncertainty in global trade and economy have thrust prices and profits into uncharted territory.

Instead, they’ve been sharpening their tools, finetuning sourcing strategies and making tough decisions on pricing to ensure their margins are in good shape, or even better than before the global turmoil began. There’s also a growing feeling that as retailers struggle with their own problems, brands are adopting a stronger stance on determining their pricing structure.

Yarn maker Unifi Inc. cited “pricing pressures” in reporting that net sales for the second quarter ended Dec. 29 had increased 1.1 percent to $169.5 million. The company said the gain was driven by an 18 percent rise in volume led by its Repreve-branded products, primarily in Asia, but partially offset by nylon declines. The overall sales increase in Asia was largely offset by a decline in average selling prices.

Gross profit increased to $15.7 million, from $14.2 million, mainly attributable to a more favorable raw material cost environment in the U.S., but partially offset by competitive pricing pressures, especially in Brazil.

“Our international operations have faced some significant pricing pressures in fiscal 2020 and global competition remains aggressive,” Tom Caudle, president and chief operating officer of Unifi, said in a conference call with analysts. “While we are confident in our ability to generate significant improvement over fiscal 2019, including sequential gross profit improvement…our full-year fiscal 2020 guidance has been updated to reflect global competitive pricing pressures and lower revenue expectations for nylon.”

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Caudle said polyester raw material costs have been “moving in our favor” and by “optimizing our manufacturing base and capturing synergies from previously acquired companies, we are able to double gross margin year-over-year.”

For vertical manufacturer Gildan Activewear, the benefit of consolidation of its manufacturing to Central America from Mexico will allow the company to improved margins 50 basis points, according to president and CEO Glenn Chamandy.

“That process is still ongoing, and our Mexican facilities will be closed in the first quarter,” Chamandy said. “A lot of that effect will come toward the end of the year and toward margin expansion as we move into 2021.”

Gildan projected gains in earnings reflects sales growth assumptions, lower raw material costs compared to the prior year and anticipated cost benefits from supply chain initiatives.

A year ago, Hanesbrands, started implementing a new pricing structure in innerwear that better reflecting shifts in raw materials costs, Scott Lewis, chief accounting officer and interim chief financial officer, said.

“What we’re seeing now, though, is the pricing continues to lap itself, that the peak of the commodities is passed, and we’re actually seeing margin improvement as the commodity costs begin to ramp down and the pricing overlaps and so we’re seeing that,” Lewis said.

For example, U.S. spot cotton prices averaged 63.67 cents per pound for the week ended Feb. 13, up from 62.97 cents the prior week, but down from 66.07 cents a year earlier, according to the U.S. Department of Agriculture.

Harmit Singh, executive vice president and chief financial officer of Levi Strauss & Co., told analysts the company has been able to institute price increases and sourcing strategies that contributed to gross margin expansion, and has the benefit of growing the direct-to-consumer channel.

The ability to put through price increases has the company forecasting a revised gross margin of 60 to 80 points next year from the normal gross 40 to 50 basis points.

“We anticipate gross margin expansion well above our long-term growth algorithm largely due to the outside favorable mix shift to direct-to-consumer related to the two Black Fridays (in the 2020 fiscal year), as well as continued favorability from our geographic mix and price increases,” Singh said. “We also expect lower sales to the off-price channel to help gross margins.”

At Columbia Sportswear, CEO Tim Boyle said the company’s fourth-quarter gross margin declined 160 basis points to 50.1 percent, driven primarily by a higher proportion of lower-gross-margin closeout product sales in wholesale and unfavorable DTC product margins reflecting increased promotional activity and shifts in product mix.

In what is normally a big month for clearance sales, retail apparel prices rose a seasonally adjusted 0.7 percent in January compared to December, which is also typically highly promotional, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI).

What could have negatively impacted Columbia’s margins was a 5.5 percent decline in outerwear prices in January compared to December. But the prices have also been affected by 7.5 percent tariffs still in place on apparel imports from China that executives have said are clearly being passed on to consumers to some extent.

Macy’s Inc. said this month that its new sourcing model that shifts the focus to product classifications and away from brands will drive profitable growth, lower costs and improve speed and agility.

“Putting in supply chain capability…will better align to consumer needs, improve efficiency and costs,” Dennis Mullahy, Macy’s chief supply chain officer, said.

For example, consolidating raw materials management will help eliminate unproductive fabric, Mullahy said at an investor conference. Instead of each siloed private-label brand working separately on fabrics choices, a product category team would look at the designs and see which ones are using a similar fabric weight and quality across the brands.

Once identified, the sourcing team would buy in bulk, leveraging the depth in the material order to negotiate a lower overall cost structure for that production component.

One design pilot resulted in $19 million in savings, including $6.3 million in sweaters and $6.4 million in cut-and-sew knits. The strategy also reduced the reorder cycle time and bolstered Macy’s ability to produce goods closer to trend, Mullahy added.