Apparel maker Gildan's forecast misses as cotton costs stay high

Reuters

By Sneha Banerjee

Nov 21 (Reuters) - Canadian clothing maker Gildan ActivewearInc forecast first-quarter profit belowanalysts' estimates, saying its cotton costs would remain highbecause it bought the raw material before prices declined.

Gildan shares fell as much as 5 percent on the Toronto StockExchange on Thursday, even though the company reported a 9percent rise in fourth-quarter profit.

Cotton prices have fallen nearly 17 percent from afive-month peak of about 94 cents per pound in August.

Montreal-based Gildan, which supplies T-shirts and otherbasic clothing items to screen printers, said cotton costs inthe first three quarters of 2014 would be higher from a yearearlier.

The company told analysts on a post-earnings conference callon Thursday that it could not raise prices of its cottonclothing to pass on higher raw material costs.

Gildan, like other retailers, said demand would remain weak.

Retailers such as Macy's Inc, Wal-Mart Stores Inc and Best Buy Co Inc have responded to weakdemand by offering big discounts even at the risk of a declinein margins.

Gildan forecast first-quarter earnings of 33 cents to 35cents per share, below the average analyst estimate of 42 cents,according to Thomson Reuters I/B/E/S.

Its 2014 profit forecast of $3.00-$3.10 per share was alsobelow the average analyst estimate of $3.15.

FOURTH-QUARTER RESULTS

The company, which also makes private-label and brandedsocks for mass-market retailers, has been shifting focus to itsown brands such as Gildan underwear and Gold Toe socks to raiseprofit margins.

However, Gildan's fourth-quarter gross margins were nearlyflat at 28.3 percent as the benefits of cheaper cotton and animproved supply chain were offset by lower net selling prices ofits printwear products.

"The real benefits to branded margins over time are going tobe the impact of cost savings from yarn spinning initiatives(and) the leveraging of infrastructure that is already built tosupport the company's retail initiatives ...," DesjardinsSecurities analyst Chase Bethel said.

"There will also be a price impact because the Gildan brandsat department stores will be priced at a premium relative to theGildan brands sold at Walmart and other discount retailers."

Gildan, whose competitors include Hanesbrands Inc and L Brands Inc, said its printwear sales rose 12.5percent to $423.9 million in the quarter ended Sept. 30.

Net sales rose 11.5 percent to $626.2 million.

The company's net income increased to $96.8 million, or 79cents per share, from $89 million, or 73 cents per share, a yearearlier.

Adjusted profit was 83 cents per share, in line withanalysts' estimates.

Gildan raised its quarterly dividend to 10.8 cents per sharefrom 9 cents.

The company's shares were down 3.5 percent at C$49.50 on theToronto Stock Exchange. The stock has risen about 41 percentthis year to Wednesday's close.

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