Shares of The Jones Group Inc. dropped 22 percent Wednesday after the firm, hit with an array of increased costs, missed third-quarter earnings expectations.
This story first appeared in the October 28, 2010 issue of WWD. Subscribe Today.
And Jones made it clear the higher prices it’s paying for raw materials, production and freight will persist and lead to higher prices at retail next year. Hanesbrands Inc., which reported strong third-quarter results after the markets closed Wednesday, also said higher retail prices are on the horizon.
Wes Card, chief executive officer of Jones, told WWD that cost pressures will continue to cut into margins in the fourth quarter. “Going into next year, we will raise some prices, and we have other initiatives planned to reduce the impact,” he said.
For the three months ended Oct. 4, income fell 4.3 percent to $29.1 million, or 34 cents a diluted share, from $30.4 million, or 36 cents, a year ago. Total revenues rose 19.4 percent to $1.02 billion from $855.7 million, which included a 19.7 percent sales uptick to $1.01 billion from $843.9 million.
Gross margin dropped to 33.5 percent of sales from 35.6 percent a year ago as cost of goods sold rose 23.3 percent to $679.5 million and selling, general and administrative expenses were up 16 percent to $282.5 million.
Revenues matched analysts’ expectations, as carried by Yahoo Finance. However, adjusted earnings per share of 54 cents were well below the 61 cents expected by analysts, sending shares down $4.29 to $15.23.
Card told WWD that, considering the cost pressures incurred, the firm did fairly well during the quarter.
“Wall Street got ahead of us….We had advised Wall Street to be cautious regarding gross margin forecasts and they forecasted the same as a year ago or higher. We’ve been beating estimates dramatically. The better you do, the harder [it is] to manage expectations,” Card said.
For the nine months, income more than doubled to $93.9 million, or $1.09 a diluted share, from $43.8 million, or 51 cents, a year ago. Total revenues rose 8.6 percent to $2.77 billion from $2.55 billion.
Richard Noll, the Hanesbrands chairman and ceo who was among the first to publicly acknowledge the severity of inflationary pressures, told Wall Street analysts Wednesday, “We have instituted a rise in rates effective no later than Feb. 1 to offset input cost inflation that we are seeing. Retail partners are seeing the recent food cost increases elsewhere in our parallel businesses and understand that the need is real. So our conversations involving price increases are never easy. There is acceptance.”
Noll said the increases are at an accelerated rate across the board from cotton to wages and other raw materials. “The magnitude of these increases for the entire apparel industry is substantial. To successfully navigate such a roller-coaster environment, we need to have the visibility to see what’s coming at us to keep our brand strong and to match the timing of price increases to cost increases.”
Aided by an integrated supply chain, Noll said Hanesbrands was able to “lock in many of our costs earlier than this time a year ago.” He also said cotton prices have continued to escalate from the low 0.80s to more than $1.30 a pound, and polyester is expected to rise 20 percent or more. He told Wall Street that with the addition of worldwide wage pressures, Hanesbrands could see “even more input cost inflation into late 2011 and early 2012.” He said the company has “formally notified retailers” that if input pressures continue, it would implement other price increases in mid-2011.
In the quarter ended Oct. 2, Hanesbrands generated net income of $61.3 million, or 63 cents, 1 cent above analysts’ estimates. Profits rose 49.1 percent from the $41.1 million, or 43 cents, of the prior-year quarter. Sales rose 10.8 percent to $1.17 billion from $1.06 billion.
Cost of sales rose more than $100 million, to $809.5 million, reducing gross margin in the quarter to 31 percent from 33.7 percent in the 2009 quarter.
Based on results to date and the pending Gear for Sports acquisition, Hanesbrands upped guidance for full-year EPS to $2.27 to $2.32, versus the previous forecast range of $2.25 to $2.35.
For the nine months, income more than tripled to $183.2 million, or $1.87 a diluted share, from $52.4 million, or 55 cents, in the year-ago period. Sales increased 9.5 percent to $3.18 billion from $2.9 billion.
Shares of Hanesbrands closed at $26.24, down 90 cents, or 3.32 percent, in trading on the New York Stock Exchange. The S&P Retail Index fell 4.09 points, or 0.9 percent, to 467.51 after recovering from more substantial declines in morning trading.