Lower cotton prices are finally making their way to the bottom lines of cotton-dependent apparel companies, and that should please investors. Cotton prices have dropped almost 3 percent over the past six months and a whopping 20 percent for the past five years. Experts think prices will remain depressed.
Michael Seery of Seery Futures said, “Prices are trading far below their 20- and 100-day moving average, telling you that the short-term trend is to the downside as we enter harvest season in the southern part of the United States. It’s a very solid crop in 2015, but not a record crop due to lower planted acres. There are problems in China currently as their economy is very wishy-washy with the perception that they will not be buying any U.S. cotton in 2015, continuing to put pressure on prices.”
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Richard Moss, chief financial officer at Hanesbrands Inc. said at the Goldman Sachs Global Retailing conference in September, “We usually see the benefit of — or not — of cotton, nine months after what you see on the big board. So, if you look at cotton prices today, that’s about what you’ll see flow through our P&L in about a year.” Hanesbrands said that cotton is only 7 percent of its cost of sales, but is still a welcome change. “We believe the cotton costs, while they will be down both quarters, will have more of an impact on Q4 than on Q3.”
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Those reduced costs have not gone unnoticed by the analysts. Taposh Bari, a Goldman Sachs analyst upgraded Hanesbrands to a buy on September 17 and one of the reasons for the upgrade was product-cost deflation. Bari wrote, “We see lower product costs as a driver of margin expansion beginning in 2H15. We calculate that a 20 percent reduction in cotton prices helps HBI’s margins by 90 basis points. We expect HBI to capture these benefits given a history of pricing power.” Bari’s 12-month target price for Hanesbrands is $40.
There are many more apparel companies set to benefit from lower cotton prices that are finally flowing through.
Anurup Pruthi, chief financial officer of The Children’s Place said during the company’s second-quarter earnings call, “We are starting to see some cotton price benefit along with the continued efforts from our sourcing teams with AUC’s (average unit costs) down — apparel AUC’s down low-single digits in the back half of the year.”
Also at the Goldman Sachs conference, PVH chief operating and financial officer Michael Shaffer said, “As we look forward, there has been some relief on product costs. We’re seeing cotton down.” He went on to say, “As we look forward, we’re seeing product costs slow, a single-digit kind of decline.”
Glenn Chamandy, chief executive officer at Gildan Activewear said at the CIBC Eastern Institutional Conference in September that the company would be saving money due to the lower cost of cotton. “Those margins should continue to materialize as we go into next year because cotton basically is pretty much fixed for the next year and it’s equal to or better prices than we have today.”
Cotton Inc. said that the decline in cotton prices over the past year and a half should benefit cotton usage by reducing uncertainty and increasing cotton’s competitiveness relative to other fibers. Cotton Inc. believes additional downward pressure on Chinese prices could develop in coming months. Certainly good news for all the apparel companies that depend on cotton for their goods.