The apparel and textile supply chain is being hit by a one-two punch of rising raw material costs and the specter of a 25 percent tariff hike on Chinese imports in the new year, which are bound to cause price increases at all levels.
The threatened tariff would come on top of a more narrow 10 percent import tax already in effect, along with a strong dollar that has already caused imbalances in currency exchange rates and impacted export prices.
A rise in raw materials
Unifi Inc., a manufacturer of recycled and synthetic yarns based in Greensboro, N.C., said in reporting quarterly earnings that with the current cost environment, its second-quarter gross profit will be unfavorably impacted by a surge in polyester raw material costs in September, driven by higher global demand and tighter supply for polyester feedstocks.
“Raw material costs have been rising over the last four quarters and there was a dramatic jump in polyester costs in September that will place even more pressure on our second-quarter profitability,” said Kevin Hall, chairman and CEO of Unifi. “While this rise is clearly a headwind, we anticipate a better relationship between pricing and cost in the second half of the year. This would benefit our third and fourth quarters, returning our profitability to the lower end of our original expectations.”
Adding to that, Hall said, “We will continue to address input cost pressures with responsive pricing actions, while focusing on increased sales of innovative solutions that we believe will provide us the portfolio differentiation necessary to achieve long-term growth.”
Glenn J. Chamandy, president and CEO of Gildan Activewear, said on a recent conference call with analysts that it’s not only cotton and polyester prices that have gone up during the year, but other costs across the supply chain, too.
“There’s definitely pressure on fiber, there’s pressure on labor, there’s pressure on dyes, chemicals, transportation,” Chamandy said. “So inflation is a factor and I think that all that together will support price increases as we go into 2019, not just with us, but I think that’s an industry phenomenon at this point.”
In a recent report, Moody’s Investor Services said apparel companies continue to face input cost inflation from things like labor and cotton that will somewhat temper profit growth over the next 12 to 18 months. Moody’s noted cotton prices have risen by roughly 15 percent year over year, but pulled back from the high of 95 cents per pound in mid-June.
“Continued increases in the cost of labor and freight will also lead to higher input costs,” Moody’s said. “After a short period of easing, currency pressures have once again become a headwind as the U.S. dollar has strengthened since February. That said, it is still below the recent peak in December 2016.”
Gerald W. Evans Jr., CEO at Hanesbrands Inc., said his company has instituted price increases in the 4 percent to 5 percent range in its innerwear business due to higher raw material costs.
“There certainly is right now some heightened chatter about that,” Evans said. “We haven’t seen tremendous elasticity in this category and, in fact, when the price increases were much larger back in the days of the cotton bubble, what we saw was that in times of rising prices, consumers tend to move to brands as re-assurance that when they spend their money, they spend it appropriately. And in our category, we know that price is really a distant fit in the ways that they choose a product and brands, and the things that brands deliver are most important. So, I don’t think that the pricing will really have an impact on the business.”
In June, cotton prices rose above $1 a pound for the first time since March 2012. The high-water mark was reached in 2008, when cotton prices topped $2 a pound due to a confluence of factors. Spot prices for U.S. cotton averaged 74.13 cents per pound for the week ended Thursday. That was down from 74.84 per pound a week earlier, but up from 66.92 cents a year ago.
The price increases may be starting to hit the retail level, as well. Retail apparel prices rose a seasonally adjusted 0.9 percent in September compared to August after declining the previous three months, according to the Consumer Price Index.
The tariff impact
While raw material cost increases might be considered cyclical and somewhat manageable, the trade war between the U.S. and China has brought higher costs to importing and exporting goods between the two countries, and an uncertain climate leading to anxiety in the industry.
Steve Rendle, chairman, president and CEO of VF Corp., said speaking on a recent conference call with analysts, “As it relates to the current trade climate between the U.S. and China, we are closely monitoring the situation and are actively involved in scenario planning.”
Rendle said roughly 11 percent of VF’s total cost of goods sold come directly to the U.S. from China. By leveraging its global supply chain, VF has positioned itself to address any additional changes in the overall trade environment with China, “and we have the ability to reposition our global sourcing footprint in the near to mid-term to mitigate the potential negative impact of additional tariffs should they materialize.”
He said VF has not seen any price increases as its supply chain team looks to manage its global footprint.
“It doesn’t mean to say that there couldn’t be,” he said. “I think as we work so well with our group of vendors across each of our businesses, we’re able to really level-set production by country based on where the most favorable tariff situation is for each of those inbound sets of goods.”
Still, Rendle said VF has been working to reduce its exposure to China for some years now.
“And where you see us now at 11 percent for our U.S. imports, we can lever that down if need be or we can maintain it,” he explained. “It’s really paying very close attention to everything that each one of us reads in the news every day and the work that we’re doing in Washington with our partners there.”
Tim Boyle, president and CEO of Columbia Sportswear Co., also speaking to analysts, said, “In 2017, 38 percent of our sales occurred outside the U.S. and are thus not directly impacted by U.S.-China trade battles. We rely on a diversified source base, mostly across Asia, and have considered our diverse and flexible supply chain to be one of our strengths. In 2018, product source in China will represent approximately 10 percent of our total imported value into the United States, more heavily weighted toward footwear than apparel.”
Boyle said looking at the $200 billion round of tariffs set to take effect Jan. 1, Columbia’s primary product categories will not be impacted, though it has faced a small impact in accessories.
“With that said, the escalating global trade battles have the potential to be very disruptive to our business, as well as our vendors, our customers and in many of the countries where we do business, including the United States,” Boyle said. “Apparel and footwear products already carry some of the nation’s highest tariffs, averaging in the double digits. To add to those high tariffs with additional punitive measures would not only have a detrimental impact on our business, it would represent a significant tax on American consumers as we pass along these additional costs over time.”
China, he added, continues to be an important market for Columbia for manufacturing and sales.
“We have a long history of sourcing in China and remain committed to maintaining these important partnerships as the local manufacturing base is critical to our success. We also have several hundred employees in our China joint-venture focused on helping Chinese consumers to stay outdoors longer with our market-leading products,” Boyle said.