CONE MILLS: DENIM GLUT OVER
Byline: Stuart Chirls
NEW YORK — The chief executive of Cone Mills told analysts that production curtailments have corrected the oversupply problems that have plagued denim makers and, coupled with strong back-to-school retail apparel sales, should help denim return to normal levels of profitability in 1998.
“There is still price and margin pressure, but we took selected curtailments earlier this year to bring our inventory back into line,” said J. Patrick Danahy, president and ceo of Cone Mills. “With cotton prices down slightly and an expanding customer base, we see denim improving in 1998.”
Danahy’s comments came at Prudential Securities’ 1997 Textile and Apparel Conference, which ended its two-day run Thursday at the Millennium Broadway Hotel here. At the same conference on Wednesday, as reported, Charles Peters Jr., senior vice president and chief financial officer, Burlington Industries, made a similar observation, noting, “We believe the denim glut is over. By the fourth quarter, we expect that most U.S. mills will be running at or near capacity.”
Turning to Cone’s overall strategies, Danahy noted that the firm is forging ahead with its five-point plan to cut costs and improve profitability. The plan includes:
Exiting noncore businesses. In the past several years, Cone has divested its foam manufacturing, synthetic and decorative fabrics businesses and real estate holdings.
Controlling costs. Cone saved $20 million in fiscal ’96 — $12 million in denim alone — through manpower reductions and process streamlining.
Reconfiguring manufacturing. Technical upgrades are making production more efficient.
Capital conservation. Cone has become more disciplined in its capital spending, allowing it to have more overall financial flexibility.
Marketing. More aggressive product development is helping Cone tune in to denim fashion trends and target new customers.
Cone is also firmly committed to its factory in Parras, Mexico, where it has shifted its basic denim production. “Basic production there is lower cost than in the U.S.,” said Danahy. “Our U.S. plants will manufacture value-added products that create appropriate returns.”
Danahy also told the conference that Cone is pursuing global expansion elsewhere. “We want a foreign platform to serve European markets. We are also looking at opportunities in Asia and South America.”
At Galey & Lord, weaving capacity is sold up, thanks to a women’s business that is growing “by leaps and bounds” and a men’s wear business that, with the exception of 1996, has posted 11.6 percent compounded growth since 1990, according to chief executive officer Arthur Wiener.
“Corduroy had sales of $100 million in ’97, a banner year,” Wiener said. “We think ’98 will be about the same. The shorts business [for corduroy] isn’t very good.”
Sales at Galey’s sportswear unit have been boosted by the addition of garment production packages through its G&L Services Co. North America, which was created when Galey bought two Mexican slacks plants from Farah in June.
“The textile business has changed,” said Wiener. “Where our customers were outsourcing their garment production to Asia, we now see it growing at a rapid rate in our hemisphere, because of the North American Free Trade Agreement, the General Agreement on Textiles and Trade and the Caribbean Basin Initiative. We can’t compete in Hong Kong, but we can here. The fabric business is alive and well if you can do it properly.”
The garment packages are only being offered to Galey’s key customers, who Wiener said include Ralph Lauren, Tommy Hilfiger, Jones New York, Liz Claiborne and Levi Strauss & Co. “We offer them a reduction in product development time and expense and enable them to bring product to market more rapidly than they now can. They have been very happy with the quality, and capacity is sold up.”
G&L will open two new sewing lines at the factories in January and is also building a third sewing factory nearby that will come on line in April. Together, they will turn out more than one million additional garments per year.
“We also increased our weaving capacity by 37 million yards annually in ’97, and another expansion in December will add another 11 million yards,” said Weiner. “A 17 percent expansion of our dyeing and finishing will clear a fabric bottleneck there, as well as double and triple overtime that we have been paying for the past nine months.”
Overall, Galey is forecasting sales of $553.2 million for fiscal ’98, up 9 percent from $504 million for ’97.
Weiner said that price pressure is still intense, and despite the tight capacity, it is unlikely Galey will be able to raise prices. “The chances are slim and none. The average price of fabric will go up slightly, but not significantly.