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Inventory Woes Send Cone Into Loss

Officials at Cone Mills Corp. blamed an aggressive, industry-wide effort to cut inventories for causing the firm to slip back into the red in the second quarter.

NEW YORK — Officials at Cone Mills Corp. blamed an aggressive, industry-wide effort to cut inventories for causing the company to slip back into the red in the second quarter.

The Greensboro, N.C.-based denim maker posted a net loss available to common shareholders of $4.6 million, or 18 cents a share, for the quarter ended June 29. The loss included $3.1 million in special charges related to financing activities. It compares with net income available to shareholders of $2 million, or 8 cents a share, a year earlier. Sales fell 23.4 percent to $96.3 million.

Chairman and chief executive officer John Bakane said in a conference call with Wall Street analysts that the slowdown in sales was the result of the poor macroeconomic environment.

“Our business is being impacted by broad inventory control measures at retail that may not be directly related to our core business and products,” he said.

He explained that the timing of the cutbacks was a reason he believed the inventory problems were not directly related to jeans sales. “This is an unusual situation from a timing standpoint in that few jeans are sold during the summer months, and it is unusual to see any backup of jeans inventories during this time of year,” he said. He added that he believed that domestic resources that sell on open terms are feeling a greater pinch at this time because most fall buying contracts with overseas suppliers are already locked into letters of credit.

At the company’s denim division, operating income slipped 36.8 percent to $5.5 million, while sales fell 22.4 percent to $78.9 million. The smaller commission-finishing and decorative-fabrics units both posted operating losses on lower sales.

Cone shares fell 7 cents, or 4.6 percent, to close at $1.47 in New York Stock Exchange trading Wednesday.

Cone officials said the slowdown in demand for denim had driven them to cut back operating schedules at their mills, starting in May. They warned that business in the second half would likely be worse than it had been in the second quarter.

Nonetheless, Bakane said Cone is looking to expand its denim manufacturing operations in Mexico. Chief financial officer Gary Smith said the Parras-Cone joint venture in Coahuila, which last week celebrated its 10th anniversary, is close to being debt-free, adding, “The joint-venture partners plan to expand the facility in 2004 on its own financing cash flow if financing on acceptable terms is not available soon.”

This story first appeared in the July 31, 2003 issue of WWD.  Subscribe Today.

As reported, Cone discussed a convertible financing deal with W.L. Ross & Co. to allow it to build additional capacity in Mexico. Today Ross’s $620.08 million bid to buy Burlington Industries Inc. faces final court approval, and sources have speculated that Cone might consider buying that company’s existing Mexican denim operation.

Smith offered few details on that possibility, saying, “While we are unable to comment on the Burlington situation at this time, we can say that Wilbur Ross remains supportive of Cone’s denim strategy.”

Pressed further by analysts, Bakane did not specifically address whether it aims to buy any Burlington facilities, but said, “Our weakness has been that we don’t have enough lower-cost capacity for migration with our customers as they move south of the border for cut and sew….We want to expand our capacity down in Mexico, because we do have the market representation to basically fill up a plant if we put one on line.”

Nonetheless, Bakane acknowledged that, overall, there is more denim capacity in the world than the market can currently sustain, and cited VF’s decision on Monday to close several domestic jeanswear plants at the cost of 1,801 jobs as further evidence of that.

“There’s got to be a shakeout in terms of capacity,” he said. “We are undergoing a shakeout in terms of capacity…It’s not over. I think when it’s cleared up, Cone Mills will be a survivor in terms of its business and operational philosophy in this hemisphere.”

For the first six months of the year, Cone posted a $3.8 million net loss available to common shareholders, representing 15 cents a share. That compares with net income of $2.4 million, 9 cents a share, a year earlier. Sales fell 14.3 percent, to $198.6 million.