- Cotton prices on Friday hit a 10-year high at $1.16 a pound and have not touched a level since July 7, 2011.
- “In 2011, we needed a prayer meeting,” Levi’s CEO Chip Berg said of the cotton crisis nearly a decade earlier.
- But today, analysts and experts say many apparel companies are in a very different position than they were in 2011. So far, the higher costs are being passed on to consumers.
The last time cotton prices were so high, it was July 2011.
“In 2011, we needed a prayer meeting,” Levi Strauss chief executive Chip Berg told investors Wednesday on an earnings call.
Berg recalled how he had just joined the denim retailer and was learning about Levi’s business. But he was also looking at the historic jump in cotton prices. Cotton surged above $2 a pound as demand for textiles from the global financial crisis hit more than $2 a pound, while India – a major cotton exporter – was restricting shipments to help its domestic partners.
Jack Kleinheng, chief economist of the National Retail Federation, said the price of a cotton T-shirt rose on average from $1.50 to $2. Its effect was felt by the consumers. And it also consumed the profits of the companies.
Berg is sitting in camp with analysts and experts who say the current cotton price inflation will be less damaging to the industry. Manufacturers and retailers have pricing power. Companies will be able to pass on higher costs without destroying consumer demand.
“It’s a very different situation today,” Berg explained. “We’ve been able to price pricing over the last 12 months and it’s sticking. … we’ve priced some of these ahead of inflationary pressures.”
Cotton prices hit a 10-year high on Friday, reaching $1.16 a pound and a level not seen since July 7, 2011. The commodity price rose nearly 6% this week, and is up 47% so far. Analysts note that bullish gains are being further intensified by traders to cover their short positions.
The runup stems from several factors. Last December, the Trump administration barred companies in the United States from importing cotton and other cotton products that originated in China’s western Xinjiang region using forced labor by the Uyghur ethnic group. Were. The ruling, which remained in place during the Biden administration, has now forced Chinese companies to buy cotton from the US, make goods with that cotton in China, and then sell it back to the US.
Extreme weather, including drought and heat waves, has also destroyed cotton crops across the US, the world’s largest exporter of the commodity. in India, low monsoon rains Threatening to damage the country’s cotton production.
Dynamic has already put pressure on shares of apparel maker Hanesbrands, known for its undergarments and cotton T-shirts. Historically, Hanesbrands shares fall as cotton prices rise. The stock is down 7% in the past week. On Friday alone, the stock closed down 5% at $16.23.
Credit Suisse analyst Michael Binetti said he believed any concerns or volatility on retail stocks due to rising cotton prices.
He said only 2% of Hanesbrands’ cost of goods sold comes directly from cotton purchases. Back in 2012, that figure was higher at 6%.
Binetti said that after a spike in cotton prices in 2011, through 2012, Hanesbrands raised the prices of various cotton commodities three times in double-digit percentages to offset inflation. HanesBrands’ profits still fell short of all the costs it was facing. But ultimately, the company maintained some of those price hikes. Today, it is in a healthy position with strong profit margins, said the Credit Suisse analyst.
“We think stocks are appreciating the most powerful dynamic that this sector hasn’t had in over a decade. Real pricing power,” Binetti said.
Retailers gain pricing power by continually moving away from discount channels and eliminating excess inventory. The COVID pandemic has acted as a “cover” for companies to accelerate this change. Ongoing supply chain constraints have also played a part in consolidating inventory. This dynamic has driven up costs so much, businesses are raising prices and consumers are still buying.
“We think inventory will remain rational, margins will remain strong, and retailers will be able to pursue more and more consistent price growth over more than a decade,” Binetti said. He expects cotton inflation to be transient.
UBS analyst Robert Samuels said the retailers he expects to be hit hardest by rising commodity prices are those that specialize in denim. Cotton accounts for over 90% of the raw material used to make jeans and other denim accessories.
“As if retailers don’t have enough things to worry about supply chain bottlenecks and labor shortages,” Samuels said in a note to customers.
But Levi’s has already tried to allay any apprehensions about its denim business.
In its earnings call, Levy said it has negotiated most of its product costs on very low-single-digit inflation during the first half of next year. For the second half of the year, it expects to see mid-single-digit growth. And Levy said it plans to offset the price hike it’s already taking pricing action on.
Levi’s is shifting its business primarily from wholesale to a mixed basis, with a growing share of direct-to-consumer sales. And with strong consumer demand and tighter inventories, it is able to sell more products at full price.
Chief Financial Officer Harmit Singh said cotton accounts for about 20% of the cost of making a pair of Levi’s jeans, with each pair of jeans containing about two pounds of cotton.
Because of the timing of its earnings call, Levi’s was one of the first apparel retailers to publicly comment on rising cotton prices. Others will report fiscal third-quarter results in the coming weeks.
According to analysts at Goldman Sachs, it will take some time for rising cotton prices to appear on retailers’ income statements as well, given the timing of contracted cotton purchases. And it’s worth noting that in 2011, cotton prices exceeded $2 a pound, well above the commodity traded today.
Still, apparel stocks may face some pressure as prices remain high. For example, analysts flagged companies such as Ralph Lauren, Gap Inc., Contour Brands and Calvin Klein-owner PVH. Shares of Wrangler and Le Jeans owner Contour Brands fell nearly 6% last week, while PVH, Gap and Ralph Lauren each ended the week down less than 2%.
—CNBC Michael Bloom ng