Higher cotton prices eat into Gildan's first-quarter profit

Surging cotton prices nipped Gildan Activewear Inc.'s first-quarter profit margins, but strong demand for its T-shirts, socks and underwear will probably allow more price increases later this year, CEO Glenn Chamandy said Wednesday.

"Cotton always was a volatile commodity subject to violent weather and the current record prices will boost production next season and bring prices down again," he said after Gildan's annual meeting.

Gildan buys its cotton in advance to cushion price changes. It was using cotton costing 90 cents U.S. a pound late last year. This week, cotton hit a record high of $1.79 U.S. a pound (March delivery).

Chamandy said Gildan has bought its cotton for most of fiscal 2011, except for the final weeks, and its mass-production plants in Central America and the Caribbean will use supplies costing just over $1.10 U.S. a pound.

Gildan's strategy of investing heavily in plant efficiency while cutting distribution costs, along with economic recovery in North America and Europe, will power further growth, he added. It has ample financial resources to exploit "selected acquisition opportunities."

Most of its projected $150 million U.S. capital spending this year will focus on the Americas, but Gildan is planning to double the low-cost Bangladesh plant's capacity - it supplies the Chinese, Japanese and Australian markets.

Sharply rising production costs are keeping new Asian competitors out of the Western Hemisphere markets, Chamandy said.

For all fiscal 2011, Gildan estimates net sales will be more than $1.6 billion U.S. with a gross margin of 25 per cent. U.S. screenprint market demand should gain three per cent. More effort will go into mass-merchandiser and branded markets to lift market share.

Gildan earlier reported that earnings in the three months ended Jan. 2 were (all figures in U.S. dollars) $35.9 million, or 29 cents a share, up from $28 million, or 23 cents a share, a year earlier. Net sales were $331 million, up 50.3 per cent. Gross margin was 24.7 per cent vs. 29.8 per cent. The first quarter makes up 20 per cent of annual sales.

For the second quarter, it expects net sales of $375 million, up 15 per cent, and gross margin of almost 27 per cent.

Some analysts said inventory rebuilding boosted the quarter's topline and a slowdown is possible in the months ahead. Chamandy said the impact of higher prices at the consumer level is uncertain at this stage.

(Source: http://www.montrealgazette.com/Higher+cotton+prices+into+Gildan+first+quarter+profit/4253617/story.html)