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Confluence of Factors Push Apparel Prices Up Despite Cotton Slump

All signs in the challenging supply chain landscape point in one direction: U.S. apparel prices are going up.

From the raw materials and inputs that go into fibers and fabrics–with the exception of cotton, which is at cyclical lows approaching 50 cents a pound–to the cost of labor and logistics, industry executive see increased costs leading to price hikes that, in many cases, have already begun.

On top of that, there’s the 800-pound gorilla in the room–the threat and likelihood of 10 percent tariffs on imports of apparel from China as early as Sept. 1 ,and the potential for higher rates down the road.

“Prices are going up, no matter how much companies try to hold them down,” Julia Hughes, president of the U.S. Fashion Industry Association, said.

As sourcing shifts out of China, Hughes said the countries that are getting increased production are raising prices to meet demand.

Tim Boyle, president and CEO of Columbia Sportswear Company, said if the tariffs on apparel are imposed, the company “along with many other manufacturers in our industry will be forced to raise prices on our products. This is a massive tax on employers and consumers, not on China.”

Already, footwear and apparel are some of the most highly taxed products in the U.S., reaching as high as 37.5 percent.

“With President Trump’s proposed 10 percent tax on goods manufactured in China, the American people will see almost half the cost of their shoes and clothing go to taxes,” Boyle said.

The impact could challenge consumer spending in an already tough retail market.

“We appreciate that the concerns around tariffs are not just based on our production in China, but also the potential negative impacts on global consumer spending,” Scott Baxter, CEO of Kontoor Brands, said. “We recognize the most recent tariffs proposed act as an incremental tax on the U.S. consumer and many retailers will look to pass on higher costs in the form of higher prices.”

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Retail apparel prices increased 1.1 percent in June, the first gain in four months, according to the Bureau of Labor Statistics (BLS). A fresh reading on prices is due on Tuesday when BLS puts out the Consumer Price Index for July.

While some cost pressures from the low raw cotton prices have eased in the supply chain, there are other areas where costs are causing prices to climb.

“The price of cotton has gone down, but there are a lot of other inflationary pressures that we have in the industry–labor, chemicals, transportation,” said Glenn J. Chamandy, president and CEO of Gildan Activewear, a vertical manufacturer from yarn to finished product.

Commenting on costs and prices on a conference call with analysts, Chamandy said, “Typically, we’ve raised prices in the last couple of years to counteract the higher price of raw materials. You’ll probably see more stable pricing as we move into 2020. At the same time, our low-cost manufacturing helps out margins.”

Thomas H. Caudle, president and chief operating officer of Unifi Inc., said the company experienced margin pressure in its international businesses, in part due to raw material cost fluctuations.

“The polyester business was dampened by the continuation of high levels of yarn imports, which play significant pressure on selling prices and profitability of our major polyester product line,” Caudle said. “However, we did experience some moderate raw material cost relief that aided gross profit.”

The Lenzing Group said, despite continued strong demand, capacity expansions for standard viscose caused higher pressure on prices, which fell to a historic low in the first half of 2019.

“The global fiber market remains under strong pressure due to the increasing fiber capacities in the Asian market, in particular in the standard fiber segment,” Lenzing said in its management report. “Lenzing therefore anticipates persisting high price pressure for standard fibers in the second half of 2019.”

Barry Hytinen, chief financial officer of Hanesbrands, said gross margin is expected to be up year-on-year for the full fiscal year “driven by more price and mix, principally in the fourth quarter, offsetting at that point lower commodity costs.”

In the third quarter, the company expects commodity costs will still be elevated.

“As we move into the fourth quarter, price will be in excess of commodity cost,” Hytinen said. “So that’s one of the reasons why [we] should anticipate gross margin performance getting better in the fourth.”

As a manufacturer, Hytinen said the company tends to see cost “long out” as it looks at its production.

“So what we saw was general labor inflation coming around the world in our manufacturing locations where apparel is made, as well as we saw some push on commodity,” he said. “We put our prices in place in mid-February and have seen them stick very nicely in the market.”

Baxter said Kontoor Brands “will be very strategic regarding pricing, with a comprehensive assessment of the elasticity helping guide our decisions.”

“This is a dynamic landscape that requires a dynamic approach and we are skilled at delivering, giving our leading supply chain expertise,” he added. “And while our supply chain is currently well positioned, we continue to seek ways to drive further competitive advantage. To that end, we began a top to bottom review of our global supply chain approach, an initiative that we are confident will yield additional process and production efficiencies to leverage and enhance our performance.”