Byline: Scott Malone / With contributions Vicki Young

NEW YORK — Pointing to a continuing weakness in the denim market, Burlington Industries Inc. warned Wednesday that it would miss Wall Street’s earnings expectations by 25 to 35 percent in its fourth quarter.
Consensus estimates for the quarter, which ends Oct. 2, had been for earnings per share of 19 cents. In the prior-year quarter, the company posted earnings per share of 28 cents, and net income of $16.7 million.
The Greensboro, N.C.-based company blamed a decline in denim prices and margins for the expected profit shortfall.
A number of factors contributed to those declines, including a rush of denim-fabric liquidations in the U.S. market as the result of two mills leaving the U.S. business, and a shift in buying toward fashion items, which typically are produced in smaller — and more expensive — runs, according to industry observers.
Analysts said they expected the weak denim pricing to have an adverse effect on Burlington rival Galey & Lord Inc. as well.
In the warning statement, Burlington chairman and chief executive officer George W. Henderson 3rd, said, “We have lowered our expectations primarily because of recent developments in the denim business, which represents approximately 17 percent of our total company sales. Excess denim capacity worldwide has recently depressed prices and margins, and may result in selective curtailment to appropriately manage inventory levels.”
Analysts said the warning was a sign that the denim business, which has been struggling all year, is worse than they previously believed.
“I thought we had a fair amount of denim softness built into my numbers, and we’re finding out that we don’t have enough,” said Kay Norwood, analyst with Wachovia Securities Inc. “It sounds like price deterioration is continuing. Maybe it’s not getting a whole lot worse yet, but who knows? There’s plenty of time for it to get worse.”
This year, Thomaston Mills Inc. shut its denim production, and India’s Arvin Mills closed a U.S. warehousing operation, as reported. Those closings provided denim buyers with many yards of clearance-priced denim and ate into the margins of other denim suppliers as well.
Norwood added that after seeing Burlington’s announcement, she expected to lower her earnings estimate for Galey & Lord for the fiscal year ending September 2000 as well. She did not plan to change her estimate for that company’s fourth quarter, to end Oct. 2, from its current level, a loss of 46 cents per share.
Galey & Lord executives did not return phone calls Wednesday.
Bryan C. Hunt, analyst at First Union Capital Markets, noted that the market forces pushing prices down are having a particularly strong effect on Burlington.
“They’re on the higher end of the spectrum with regard to quality,” he said. “So with the pricing structure declining, you have a little further to fall.”
He added that, given the margin deterioration Burlington is describing, its average selling prices for denim are likely off 8 to 10 percent.
In Wednesday’s trading on the Big Board, Burlington shares fell 13/16, to close at 5 1/8.
At Cone Mills, G. Watts Carr 3rd, president of the textile group, said in a telephone interview, “There is continued price pressure, although we have not seen any significant erosion in pricing in the last six to eight weeks. I think a lot of the price decreases had occurred over the prior 12 to 15 months.”
Norwood, of Wachovia, suggested that part of the reason that Cone is not experiencing a price decline currently is that it digested one earlier in the year, when Levi Strauss & Co., a major customer, announced plans to move a large chunk of its production offshore.
Carr also noted that Cone does “continue to see a weakening in our shipments, which is attributable primarily to one or two major accounts.”
He did not name the accounts in question.
“We don’t feel there is very much room for further decreases,” he added. He also contended that the recent downward movements in denim prices resulting from Thomaston’s and Arvin’s closing operations “are anomalies, and do not represent broad market forces.”
In a recent report, Ethan Schwartz, an analyst at Credit Research & Trading LLC, a Greenwich, Conn., firm that specializes in distressed securities, said that a number of trends are working to hurt the domestic denim industry right now.
Among those trends, he said, are:
A wave of new plants coming online around the world in recent years, outpacing growth in denim consumption, and leading to overcapacity of 17 percent in the Western Hemisphere and 24 percent worldwide.
The rising popularity of new fashion brands of jeans and private-label jeans, many of which are made by companies other than traditional U.S. jeans makers.
A movement of more sourcing offshore from domestic makers to independent contractors.
“The shift to ‘the Gap’ model [of sourcing] by companies such as Levi Strauss has broken the traditional link between U.S. denim suppliers and U.S. clothing manufacturers and brands,” Schwartz wrote.
Highlighting the issues that denim mills are facing, Moody’s Investors Service said in a research report Wednesday that the credit quality of some denim manufacturers may decline further before it improves.
The agency has recently downgraded the three top publicly traded denim mills: it rated Cone B1, down from Ba2 last month, and the mill is “under review for further downgrade”; Galey & Lord, B3, downgraded from B1 last month, has a “negative outlook,” and Burlington was downgraded to Ba1 from Baa3 in July.
Denim producers, Moody’s noted, have been pressured by the “growing tendency of apparel producers and retailers to share the pain of their missteps in design and product mix with their suppliers.”
In addition, the ratings service expects the future profile of the denim producer to be broadened to include a “designer and fabric innovator, low-cost producer, inventory manager and supplier of prepackaged, floor-ready product,” due to changing industry demands.
But Moody’s also noted that denim producers face “greater business risk” than jeans producers. Partnerships designed to improve inventory management and distribution, Moody’s said, have already shifted the business risk to the textile producer, with inventory buildup occurring at the warehouse of the mill rather than further down the supply chain. Moreover, companies with significant customer concentrations will be hit harder than textiles companies that have either a broader customer base or have the ability to respond quickly to changing fashion demands, Moody’s said.