ANALYSTS: A BLEAK 4TH QUARTER

Byline: Diane E. Picard

NEW YORK--Despite strong denim business, analysts say the third-quarter performance of textile companies was riddled with problems. That trend, they add, is expected to continue through the current quarter and possibly into 1996 before there is any pickup.
Demand for most textiles has been weak throughout 1995, reflecting lackluster retail sales and increasing penetration of imports, according to Jay J. Meltzer of Johnson Redbook Service. July's upturn in textile orders did not carry into August, he noted.
The results were "depressing," said Lorraine Miller, at Atlanta-based Robinson Humphrey. She said they reflected an underlying theme of cost increases pitted against lower demand for fabric.
"The companies have to contend with higher raw material and fiber costs but cannot increase their prices to offset that," Miller said.
But denim sales were strong, going against the overall trend, she noted. The fourth quarter will be just as tough for some companies and worse for others, noted Jack Pickler, textile analyst with Prudential Securities, adding that he expects earnings to hit some dramatically low levels.
"Within three to six months, operating results will begin to get better, but the fourth quarter is going to be bad," he said.
Pickler said much of the improvement will result from the manufacturers "squeezing the pipeline clean and getting rid of backlog."
Kay Norwood, analyst at Charlotte-based Interstate/Johnson Lane, agreed that the fourth quarter will still pose problems for the textile industry.
"Consumer spending is focused on hard goods, and the apparel pipeline has largely been filled," she said. About half of the companies Norwood covers are expected to show negative earnings comparisons for the fourth quarter.
Fiscal 1996, however, should be an improvement, she said; raw material costs are expected to ease, including a break in cotton prices.
"No worse than flat raw materials costs and a more positive outlook for the economy--not to mention easier comparisons--lead us to expect improved earnings next year," Norwood said.
Meltzer said he expects several things to happen to ameliorate fourth-quarter performances.
"Markets will work off excess inventories and raw material costs will be lower," he said. "But 1996 will be a tough year."
In this year's September quarter, textile manufacturers with home furnishings departments were able to go against the prevailing atmosphere, Meltzer said. Companies like Springs Industries, Westpoint Stevens and Burlington Industries did better because of their home divisions, he added.
Prudential's Pickler said that although the quarter was bad, it was not a surprise: "The September quarter was expected to be the worst we might see." Norwood called fiscal 1995 a year "best forgotten."
Sluggish sales growth and unrecovered raw materials cost increases combined to squeeze margins and reduce the earnings of textile companies all year. In the third quarter, Norwood said, retail sales softened further, and the result was the worst earnings-per-share comparisons of the year.
"I think raw material costs were the culprit, but retail has all but disappeared," Norwood said, adding that the retailers are trying to get their inventories in line.
A compilation of the results of a dozen firms showed an average drop of 32.8 percent in earnings for the latest nine months (see chart). For the quarter, the bottom lines added up to a loss of $387,000, against profits of $31 million a year ago. Big special charges at several of the firms were a factor in pushing the total into the red, and seven of the firms in all showed worse results this year than last.
Among the better performers in the third quarter were Springs and Guilford Mills, which will report the results of its latest quarter, its fourth, on Nov. 16.
Guilford is in its seasonal slow period, Norwood said. Per-share earnings for the quarter are expected to come in at 50 cents against 61 cents a year earlier. Sales for the company's December quarter are expected to be 5 percent below last year's first-quarter earnings of 44 cents. Burlington Industries was expected to earn 20 cents a share in the September quarter (it earned 21 cents), up marginally from a year ago, Pickler said.
"Clearly, Burlington has some strong businesses and some weak ones," he said, adding that the performance in the company's two big divisions--synthetics and men's apparel fabrics--are having problems that are slightly offset by stronger performance from the denim segment.
Denim sales improved later in the quarter, as cotton prices became less of an issue, Pickler said.
Norwood agreed that Burlington's performance was "a shade" better than the rest but anticipates earnings lower than a year ago in the December quarter.
Cone Mills' performance is similar to Burlington's, he said, with business helped by an improvement in denim sales. Cone's third-quarter earnings were 19 cents a share, close to Johnson Redbook estimates of 20 cents and down from 28 cents a year ago. Strong denim sales, which account for about half of the company's $900 million volume, were "more than offset" by weakness in sportswear fabrics, especially in flannels.
Looking ahead, Johnson Redbook estimates Cone Mills' earnings at 16 cents to 24 cents for the December quarter and 73 cents to $1.19 a share for the full year. A year ago in the fourth quarter, Cone Mills earned 90 cents a share and $1.30 for the full year. Redbook said it expects recovery in Cone's nondenim segments, a benefit of lower cotton costs.
Cone Mills had a very bad quarter, "but it was expected," said Morgan Stanley's Josie Esquivel.
"Cone's weaker businesses are dragging margins down," she said, noting that it is the company's nonapparel fabrics causing the problems.
Fourth-quarter estimates have been adjusted to 18 cents and full-year estimates have been pushed to $1.10, but Esquivel is not convinced the company will reach that goal.
"They think they see the light at the end of the tunnel," she said, "but I'm not all that confident."
Springs Industries fared better than the rest, with earnings per share down only 2 percent to $1.08 from last year's $1.10, she said.
According to Pickler, Springs Industries performed on target for the quarter.
"They have been helped by the fact that they are a very diversified company," Pickler said. Its home fabrics business was kind of flat, consistent with the current retail atmosphere. Apparel fabrics sales were weaker.
"I'm generally encouraged by the numbers, despite the environment," Pickler said. "They are trying to focus on reducing costs and improving profitability by reducing overhead."
Esquivel said she expects Spring's fourth-quarter earnings to be slightly down at $1.24 a share, compared with last year's $1.34 on a 20 percent sales increase. But, she noted, the bulk of the strength was the result of the company's acquisitions of Dundee Mills Inc. and the principal assets of Dawson Home Furnishings earlier this year.
Earnings at Unifi dropped to 10 cents a share from 32 cents a year earlier in the quarter ended Sept. 24. Unifi's cotton yarn sales performance was hurt by lower sales at Fruit of the Loom, a large Unifi customer, Robinson-Humphrey's Miller said. Galey & Lord performed as advertised, although revenues were a bit lower, Pickler said. After special items, Galey's net loss was 46 cents a share. But Galey's performance is not totally indicative of its whole business, said Pickler, who noted that the company recently eliminated its print fabrics segment and has cut back on some of its home furnishings orders.
Dixie Yarns' performance for the latest quarter was disappointing, Norwood said, "and I don't see a lot of changes in the fourth." Dixie reported a net loss of 53 cents a share.
Originally, Norwood's earnings estimate for the fourth quarter was 15 cents a share, but she suspects the company's full-year operating results will be in the red. In the year-ago fourth quarter ended Dec. 31, the company earned 7 cents a share. In the year-ago fiscal year, the company reported a loss of 24 cents a share.
Meltzer added that Dixie's poor performance trend will prevail into 1996.
Forstmann Inc. filed for Chapter 11 proceedings on Sept. 22 and was not included in the third-quarter analysis.-- Fairchild News Service

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