Rising cotton prices reduce clothing retailers’ shares

Cotton prices have hit record highs since 2011 last week, with retail clothing stocks posting multi-day losses.

Gap led the way with a drop of more than 4% on Monday, compounding a 7% five-day drop to around $ 22.25 per share. Likewise, denim jeans maker Levi Strauss lost 3.33% on Monday to $ 24.64 a share. Underwear maker Hanesbrands rose 1% on the day, but is down more than 5.5% in the past five trading days as the price of cotton rose.

Cotton prices closed above $ 1.11 a pound last week, up 25% since September 20 and the highest price since July 2011.

Levi Stauss

Due to the timing of its third quarter earnings report last week, Levi Stauss was the first major clothing retailer to publicly comment on cotton prices.

Management noted that it negotiated most of its production costs in the first half of 2022 at a “very low single digit” inflation rate and expects mid single digit increases for the second half of the year. 2022 which will be offset by price increases already in effect. place. Levi Strauss uses two pounds of cotton in each pair of pants, so cotton accounts for about 20% of the cost of the product, CFO Harmit Singh said on the call.

Levi Strauss Chairman and CEO Chip Bergh said there were two factors that made this rise of cotton different for the company compared to 2011. On the one hand, the company is more international. now and has higher margins overseas. Second, Bergh says the brand is now stronger and can withstand price increases.

“In 2011, we didn’t have the pricing power,” Bergh said during the earnings call. “We’ve been able to take prices over the past 12 months and it sticks. If the inflation and / or cotton and / or cost of goods issues can get worse than what we have built into our model right now, (then) if we have to take more price, we will find where and how to do that.

Inflation pressures

Rising cotton prices are just the latest inflationary pressures retailers face, from rising transportation costs to skyrocketing oil prices to multi-year highs.

Most retailers passed these price increases on to consumers, and under the guise of the pandemic, most were able to do so without losing market share.

“When we think about the challenges of inflation and costs, it really is a combination of cost savings, manufacturing efficiency and – if necessary – pricing initiatives,” said Stephen Bratspiesm, CEO of Hanesbrands, earnings call from August.

“The good news for us is that I think our brands have pricing power in the market. Their strengths allow us to do so.

Read more: Cotton Price Prediction: Will Raw Material Hit $ 1 / lb?

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Anne G. Cash

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