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Retailers Keep a Close Eye on Cotton Prices

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Warm seasonal weather, an improving job market and rising home prices may have enticed consumers to go to specialty retail shops in June, according to Ike Boruchow, senior vice president of Sterne Agee, but the high cost of cotton is squeezing margins.

Cotton climbed about 16 percent this year on ICE Futures U.S. in New York.

“There were several hundred basis points of margin hit when cotton costs started to spike,” Boruchow said, adding that cotton costs really hit the P&L in the second half of 2011. “We’re now looking at the operating margins of the specialty retailers at all-time highs.”

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There are ways to make money in the group, although Boruchow said investors will need to be a little bit more stock selective.

Sterne Agee’s top pick is Fifth and Pacific Companies (FNP), which owns the Juicy, Lucky and Kate Spade brands. “I think they have lightening in a bottle with the Kate Spade business and that business continues to gain momentum,” he said.

Boruchow is not ruling out asset sales of the two other brands.

“The company may look to divest the Lucky and Juicy business which would generate some cash to recap the balance sheets.”

Disclosure: Boruchow does not own stocks mentioned.

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