* Focus will be on building margin back up, cushion
* Prices will be lowered only by competitive pressure
* No avoiding cotton for jeans
By Nivedita Bhattacharjee and Phil Wahba
Oct 25 U.S. shoppers who bought jeans, T-shirts
and socks lately have had to shell out more cash. They'd better
get used to it.
Even as cotton prices recede from all-time highs set in the
spring, retailers and clothing makers are set to keep most of
the price rises they implemented earlier in the year, when they
sought to contain the damage to margins. And most will only
offer discounts when they face pressure from their rivals.
Store chains and their suppliers avoided raising prices as
long as they could, fearful of a backlash from consumers still
dealing with high unemployment and gasoline prices.
But just as they did not pass on all their cost increases,
retailers and clothiers won't hand over all their savings.
In fact, many will try to hang on to any margin gains next
year as a cushion against other rising costs, betting that
shoppers are growing used to paying a bit more after a decade
with little clothing inflation.
"The reality is that we American consumers have enjoyed low
prices on apparel for some time," Robert Shearer, chief
financial officer of VF Corp , told Reuters in an
interview on Monday. VF makes the moderately priced Wrangler
and Lee jeans brands.
VF's gross margin, which measures the profitability of
goods sold, shrank 1.2 points to 45.3 percent in its most
recent quarter, due entirely to its jeans business, which only
makes up a quarter of company sales.
Gap Inc in May said product costs would go up 20
percent in the second half of 2011, and it could not increase
prices enough to make up for that.
Cotton futures trading on ICE Futures U.S. surged to a
record high in March after climbing nearly three times in value
from the previous year, when the spot cotton contract
sat roughly around 80 cents per pound.
The contract has since dropped by more than half, but is
still 40 percent above levels of two years ago.
How much prices rise depends on the item and how much
cotton is in it. But NPD Group's chief retail industry analyst
Marshal Cohen estimates that basic socks, underwear and jeans
prices have gone up by 10 percent or so.
An extra $3 on a pair of jeans may not seem like much, but
on a $30 pair of Wranglers, it is noticeable -- and can be a
hardship for shoppers who also have to shell out 23 percent
more on average to fill a tank with gasoline than a year ago.
VF said Monday that U.S. jeans sales were up slightly in
dollar terms, thanks to moderate price increases, but it sold
fewer pairs, illustrating the fine line clothes makers and
stores must walk.
AlixPartners managing director David Bassuk estimates that
retailers were at best able to pass off half of their higher
costs to shoppers, sharing the hit to margins with suppliers
for the rest.
Now VF, Gap and other companies that sell clothes using a
lot of cotton -- like American Eagle Outfitters Inc and
Nike Inc -- are telling investors that their gross
margins should improve starting in the second half of 2012.
"The benefit from cotton costs going down is going to be
reflected in margins. They are not going to lower the prices,"
said NPD's Cohen.
And Perry Ellis International Inc Chief Executive
Officer George Feldenkreis pointed out that cotton isn't the
only cost that has risen: labor costs in China, where most
clothing bought by U.S. consumers is made, are up, and higher
gas prices have raised the costs of getting products to
Given the nine-month-to-a-year lead time in the supply
chain, prices will in fact continue to increase gently into the
spring. After that, they should stabilize at higher levels.
"There won't be a drop in retail prices, but price
increases will stop" said Nate Herman, vice president of
international trade of the American Apparel & Footwear
Association, which represents some 700 U.S. clothing
NO ESCAPING COTTON
One thing that may help rein in prices for consumers, to
some extent, is competition. Consumers can buy basics like blue
jeans from any number of vendors, making higher cotton costs
scary for retailers and manufacturers.
Jones Group Inc for one is currently trying to get
out of jeanswear, a business which stagnating sales and lower
margins has made no longer worth pursuing.
Some companies like Levi Strauss & Co and HanesBrands Inc are experimenting with organic fiber, made of flax and
hemp, to contain cotton costs.
But so far, such efforts are rare in the apparel industry.
VF looked into different fabrics but ultimately decided it
had to stick to cotton only.
"Consumers, when they pick up a pair of Wrangler jeans or
Lee jeans, have certain expectations," VF's Shearer said.
Experimenting with how jeans feel would "harm the brand."
But there is another factor that could push prices back
down: continued weakness in the U.S. job market and overall
Unemployment is still high and retail sales in recent
months have shown only slight growth, meaning some retailers
might have to cut prices again, especially if sales in the
upcoming holiday season were tepid and rivals panicked.
"The economy and the lack of a recovery will be more likely
reasons for prices coming down," NPD's Cohen said. "Retailers
are going to get competitive on motivating the consumer."