CONE MILLS EXPECTS QUARTER NET BELOW ESTIMATES OF ANALYSTS

Byline: Scott Malone

NEW YORK — The textile industry just can’t catch a break.
Cone Mills Corp. last week warned that the continuing weakness in the denim business would leave its third-quarter results below analysts’ projections, but gave no specific numbers. Analysts had already been expecting the company to lose money.
The company also said that G. Watts Carr 3rd, 56, would be retiring as president of Cone Textile Group.
The earnings announcement came one day after Burlington Industries Inc. said that the denim downturn would cause its results for the quarter to fall 25 to 35 percent below Wall Street’s consensus.
Analysts were left scrambling to re-do their financial forecasts for the denim industry. A Friday afternoon check with First Call showed that three of six analysts covering Cone had lowered their estimates on the company’s performance in the quarter, to an average loss of 15 cents from an average loss of 2 cents. One of three analysts covering Galey & Lord Inc. had entered a lower estimate: to a loss of 38 cents from break-even for the September quarter.
In a statement, Greensboro, N.C.-based Cone blamed the weakness on “slowing retail sales of basic denim jeans, an oversupply condition in denims and related near-term inventory adjustments made by customers.”
Observers pointed to a shift in shopping patterns among young people — key denim consumers — to newer retail channels and newer jeans brands, all of which are not as closely tied to domestic denim producers.
“It sounds like a continuation of last year’s trouble in a channel — J.C. Penney. The middle-of-the-road department stores are having a hard time of it,” said Thomas J. Lewis, analyst with C.L. King & Associates, Albany, N.Y.
Analysts noted that younger shoppers are turning their attention towards branded specialty stores, like The Gap and Abercrombie & Fitch, and away from Sears and Penney’s.
“I hate to offer a sample of one, but yesterday, my 16-year-old started asking what it is like to shop in a department store,” Lewis said.
Mills have pointed to a number of factors driving prices down, including decisions this year by Thomaston Mills Inc. to close its denim operations and India’s Arvin Mills to close its U.S. warehousing operations. Both began liquidating their inventories this summer. And despite those closings, analysts suggested, even more consolidation may be ahead for the industry.
“As long as the same people are out there making the same amount of denim, or having the same amount of capacity, this situation is not going to right itself,” said Kay Norwood, analyst with Wachovia Securities Inc. “Clearly, everybody recognizes that something needs to be done to reduce capacity in the industry, but I don’t see anybody stepping out and saying, ‘I’ll do it.”‘
Currently, denim-making capacity in the Western Hemisphere ranges from 14 to 17 percent over demand, according to various industry estimates. And that overcapacity is making it difficult for mills to earn adequate returns on the yards they sell, Norwood added.
“If they’re not running full, they’re not going to get price increases,” she said. “If they’re not getting price increases, I don’t see how any of them are going to make any money.”
Also on Friday, Standard & Poor’s placed Cone Mills on credit watch, “with negative implications.” It had placed Burlington on credit watch, also negative, on Thursday. Galey & Lord has been on credit watch, also negative, for “several months now” according to Jayne Ross, a credit analyst with the agency.
The earnings revisions somewhat overshadowed Cone’s announcement that Carr plans to retire Sept. 30.
Carr joined the company in 1996 as president of Cone Denim North America. Earlier this year, he was named an executive vice president of the company and president of Cone Textile Group, adding responsibility for casual woven fabrics.
In a statement, Cone president and chief executive officer John Bakane said, “We greatly appreciate the leadership Watts has given to the Cone Textile Group and we wish for him an enjoyable retirement from the battles we all face in the textile industry. In order to further streamline the management structure, Cone will not fill the vacancy created by Watts’ decision to retire.”
A Cone spokeswoman said that all executives who had reported to Carr will report to Bakane.
The statement said that Carr intends to “devote more time to personal and family activities,” which includes seats on several boards of public and private organizations.
Before joining Cone, Carr served for three years as director of business and industry development at the North Carolina Department of Commerce.
Carr could not be reached for comment.
Analysts could point to few clear reasons for Carr’s retirement, though some suggested that the current black mood of the textile industry could have been a factor.
“Do people see the handwriting on the wall and figure, you need to cut costs, and therefore I’ll make this easy? I don’t know,” said Norwood, of Wachovia.