Byline: Scott Malone
NEW YORK — “Suck it up and cut costs.”
That was one equity analyst’s assessment of how textile companies can best handle the rising prices of fibers and energy that they have faced over the past year. But in some ways the words also describe the approach mills are taking to all aspects of their business.
After 18 months of intense pressure from fiber makers to raise prices, First Union Capital Markets analyst Bryan Hunt suggested that synthetic fiber prices are not likely to rise at a great rate this year. Still, that’s not going to make it any easier for mills to digest the increases they absorbed in 2000.
“For the most part, I would say synthetic materials could see incremental price increases [going forward.] On the cotton side, prices will definitely be up,” Hunt said. “But it’s a difficult environment to pass price increases through for fabric producers. I’d say it’s virtually impossible.”
The ray of hope he sees is that mills are moving to chop their expenses — over the past six months, Burlington Industries, Guilford Mills, Galey & Lord and Cone Mills all have announced cost-cutting moves.
“That’s what you see companies doing,” Hunt added. “They’re moving to Mexico and consolidating facilities.
Still, while the restructurings, layoffs and plant relocations may be the domestic industry’s best long-term hope, they’re not making the present any easier.
In the third quarter of 2000, heavy restructuring charges and general margin erosion led 5 out of 11 top publicly traded U.S. textile companies in a WWD survey to report net losses.
As a group, the companies ended the quarter deeply in the red, reporting a combined $581.9 million net loss — although that number was heavily influenced by Burlington’s write-off of all goodwill associated with the company, to the tune of $473.2 million before taxes.
Staggering losses are no new thing to textile companies, although the group had managed to keep its ahead above water for the first two quarters of 1999.
The collective third-quarter 2000 net loss compared with a $5.2 million net loss a year earlier. The loss came despite sales growth, as revenues for the group rose 6.2 percent to $2.01 billion.
The group of textile companies included in the survey is a little smaller this quarter. As reported, JPS Industries in November sold its apparel fabrics unit to a group headed by its former chairman, Jerry Hunter. The company, which continues to produce industrial materials, treated that business as a discontinued operation in its results for the quarter ended Oct. 28.
While the overall numbers were bleak, business was by no means bad across-the-board in the third quarter. After suffering through a downturn in late 1999, the denim business was strong for much of 2000.
Thomas J. Lewis, analyst with C.L. King & Associates, noted that in late 1999, “all the things that could go wrong were going wrong” for denim mills.
“The business is now fundamentally better,” he continued. “Is it as tight as it seemed to be in May? No, not really. But demand for traditional denim looks bounced back nicely this year.”
The 1999 downturn was caused by Levi Strauss & Co.’s decision to cut back sharply on fabric buying while it tried to get high inventory levels back under control. That hurt all U.S. denim mills, even those who don’t rely heavily on Levi’s business.
Analysts said that late this year, denim orders softened slightly, mainly as a result of retailers becoming a little more cautious in their buying in the face of slowing consumer spending. But the decline in orders is not nearly as severe as that which came in 1999, and observers said they expect the denim business to remain solid this year.
“Unless the economy just rolls over and dies, they are going to have a good year,” said Lewis.
Indeed, increasing demand for North American-made jeans has both Galey and Cone increasing the capacity of their Mexican joint-venture denim mills. Burlington has also invested heavily in lower-cost Mexican denim production.
At this point, the largest U.S. denim mill not to begin a migration to Mexico is Avondale Mills, which this spring kicked off a $115 million modernization program for its Alabama and South Carolina mills.
But while the denim business itself is expected to remain strong, restructuring charges are likely to take their toll on denim mills’ bottom lines for the near future. For the just-ended fourth quarter of 2000, Wall Street expects Burlington and Galey to each post losses, according to First Call. Cone is projected to post a modest profit of 1 cent a share.
Still, analysts said the short-term pain will probably prove beneficial.
“This is an old industry,” Lewis said. “You might depreciate a piece of equipment over five to seven years, but you might run it for 20 years. There are some hard choices, like Galey shutting down that Erwin plant. That’s been a troubled plant for 15 years, at least.”
As reported, Galey said in September it would close its Erwin, N.C., denim mills, as well as its yarn spinning operations. The company is moving the weaving operations to its modern Mexican joint-venture plant and has agreed to buy yarn from Parkdale Mills.
But while the denim business is expected to be strong this year, other areas of the textile market seem soft.
In December, Wellman Inc. warned that it expects total polyester sales in 2001 to fall below its capacity. In anticipation of that, the company planned to take its Pearl River, Miss., staple production capacity off-line late last month.
While the company warned that the plant idling would result in fourth-quarter charges, its results are expected to come in at a profit of 18 cents a share, up from 8 cents or $2.5 million, a year earlier.
Polyester and nylon maker Unifi Inc. is expected to see its results slide in the quarter, to 14 cents a share compared with 17 cents, or $10.2 million net.
“Their customers aren’t in very good shape,” said First Union’s Hunt. “Not only are their apparel customers being impacted by imports and moving their manufacturing capacity, but the automotive and home fashions markets are weakening, as well.”
Another factor that hurt some textile makers was the strength of the dollar against foreign currencies, which made European fabrics comparatively less expensive and trimmed exports.
“In most cases, Europe is not normally a source of textile imports, other than highly specialized things,” said C.K. King’s Lewis. “That was a surprise in the third quarter. Burlington, for example, usually sells a lot to Europe.”
Synthetic fabrics maker Guilford Mills is expected to report bottom-line deterioration for the quarter. First Call pegged the consensus at a loss of 16 cents a share, compared with a profit last year.
Dan River is expected to post flat earnings of around 9 cents a share. The company posted $2 million in net income for the fourth quarter last year.
Low stock prices have caused analysts to drop coverage of several mills, so earnings estimates are not available for all companies in the survey.