Soaring Cotton Prices Weigh on the Apparel Industry

Apparel Profits at Risk Due to High Cotton Prices

The apparel industry is already dealing with shipping delays, factory shutdowns in Vietnam, and rising labor costs. Now they can add rising prices for cotton to their list of woes.

Cotton prices have been soaring over the last month, which is pressuring the profit margins of apparel makers, fast-fashion retailers, and other arms of the clothing industry. Cotton prices have jumped 18% in the last month andhave surged 42.5% higher so far this year. Because of these trends, shares of Levi Strauss & Co. (LEVI), which depends on jeans and cotton apparel, and retailers like H&M (HNNMY) and Inditex (IDEXY) are under pressure.

Levi Strauss & Co. Bucks the Trend

Levi Strauss & Co. is trying to ease investors’ concerns about increasing cotton prices and other hardships. When reporting earnings earlier this week, the apparel maker said it had previously negotiated most of its cotton prices through the first half of next year. As a result, the apparel maker only expects the cost of goods sold to increase 1% in the first six months of next year.

For the second half of 2022, Levi Strauss & Co. said cotton prices could result in a mid-single-digit increase in the cost of goods sold compared to a year earlier. Cotton represents about one-fifth of the company’s costs to produce jeans. Back in 2011 when high cotton prices ate away at apparel makers’ profits, the firm’s gross margins took a 2.2 percentage point hit.

Low-Price Apparel Makers and Retailers Face Significant Hardships

Apparel companies selling low-priced clothing are poised to be hit the hardest by rising cotton prices. After all, their margins are already tight. That is the case at Hanesbrands (HBI), which makes affordably priced T-shirts and underwear. In the last quarter, gross margins only expanded by 0.6 percentage points when compared to pre-pandemic 2019. Meanwhile Inditex, which owns fast-fashion retailer Zara, saw margins increase by only 1.5 percentage points.

Levi Strauss & Co. expects to weather rising cotton prices relatively unscathed, but it is not as cut and dry for the rest of the industry. It will be interesting to see how apparel makers and fast-fashion retailers respond if cotton prices continue to soar.

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