1 Company Failing to Manage High Cotton Prices


If you're high-end footwear company Christian Louboutin, you have the flexibility to pass raw material costs on to your consumers. At around $2,000 a pair, very few interested buyers are going to notice a $25 price increase. On the other hand, if you're functional-if-not-fashionable Hanesbrands (NYS: HBI) , it can be more difficult to pass on an increase in cotton prices. Hanes' first quarter reflected that hardship.

Threadbare margins
Hanes reported a net loss of $27 million in Q1 2012. This was a tremendous fall from the same quarter in 2011 when income was $48 million. The difference between the two years came down to slightly lower revenue coupled with the cost of sales. In 2011, costs were 66% of revenue; then in 2012, costs jumped to 75% of revenue.

The company relies heavily on cotton for the manufacture of its clothing, and cotton rates, despite falling from 2011 peaks, still remain historically high. Hanes has now locked in cotton prices through December and reports that the worst of the cost increases are behind it though.

The cost of cotton would be less of an issue if Hanes had better pricing power. Because the brand has a largely functional connotation, it can't easily pass on a price increase. Luxury companies such as True Religion (NAS: TRLG) have the brand strength to pass on increases in cost and maintain margins. The jeans manufacturer held its costs to 35% from 2011 to 2012

Other companies such as Street darling lululemon athletica (NAS: LULU) use a lot of synthetics to create their clothing, and coupled with their impressive brand strength haven't been as damaged by cotton fluctuation. Cost of production at the yoga retailer actual fell over 2011, from 45% to 43%.

What you see is what you get
Hanes is a lower-end apparel company. The Hanes brand is synonymous with fairly priced, fairly built merchandise. Any major price fluctuation could harm that reputation and send customers to cheaper competitors. Because of this sensitivity, raw material price increases will continue to hurt Hanes' bottom line. If prices drop, the company will prosper.

Alternatively, if the company can better hedge itself against commodity fluctuations, I'd be happy to take another look at the stock. For an insight into other companies that are managing their supply lines more effectively, check out the Fool's free report on consumer goods. These three companies are taking care of themselves and investors. Get your copy today.

At the time thisarticle was published Fool contributor Andrew Marder doesn't own in any of the stocks mentioned in this article. The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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