MAINTAINING MARGIN KEY TEST AT MILLS
Byline: Jennifer Brady
NEW YORK — Although demand remains strong at many textile firms, the ability to meet higher costs and rising raw material prices has become an increasingly crucial bottom-line factor.
The pressure on margins dented earnings for several mills in the third quarter and should continue to have an impact on profits into 1995, according to Wall Street analysts. However, a number of mills still managed to move strongly ahead.
Analysts forecast that fourth-quarter results will be weak for those apparel textile companies that have not been able to raise prices to cover higher costs. As analysts see it, the mills that will continue to be battered in the near term include Cone Mills, Burlington Industries, Thomaston Industries, Forstmann Inc. and Texfi.
On the brighter side, Guilford Mills, Galey & Lord and WestPoint Stevens seemed to be pulling ahead with solid gains in the third quarter. A turnaround in demand for knit fabrics has sparked results at Guilford, while sharp gains at its Alamac knits division drove sales at WestPoint Stevens. Galey & Lord continued to benefit from strength in wrinkle-resistant fabric sold to men’s wear manufacturers.
A survey of 15 textile firms shows profits excluding special items rose 21.6 percent against generally depressed results a year earlier. Combined sales in the third quarter were up 9 percent. In the nine months, though, profits slid 11.7 percent before special charges for the group, while sales gained 3.6 percent.
Jack Pickler, analyst at Prudential Securities, said that while mills have strong order rates and high operating rates, “margins are being squeezed by higher costs.” Margins are not only being hurt by higher fiber prices but by higher prices for corrugated board, plastic and dyes, Pickler said.
Guilford Mills had a stellar quarter, easily topping analyst estimates. Pickler added that results for the latest quarter at Guilford were driven by significant sales gains in apparel fabrics, which jumped 47 percent.
Pickler noted that Guilford has been able to gain price increases in the synthetics areas. “Most synthetic fabrics mills are less resistant to raising prices, as opposed to the producers of cotton and worsted wool,” he said.
Kay Norwood, analyst at Charlotte, N.C.-based Interstate Johnson Lane, expects to see solid improvement in all Guilford’s businesses, including swimwear and Lycra blends used for shapewear. For its first quarter ending in January, Norwood estimates Guilford will earn 31 cents a share against 28 cents a year earlier, and she anticipates $2.50 against $1.82 in the full fiscal year.
Galey & Lord was another winner. “Strong demand for wrinkle-resistant apparel is fueling the earnings growth at Galey & Lord,” Norwood said. She estimates G&L will earn 41 cents in its first quarter ending in January, against 36 cents a year ago.
The analysts noted that Galey & Lord’s margins should improve with lower costs in the first quarter. In addition, printed fabrics are gaining some volume and are expected to show stronger orders in 1995. Norwood expects G&L to earn $1.80 in fiscal 1995 versus $1.56.
While demand is up for all product lines at Burlington Industries, higher raw material costs in such fibers as cotton, polyester and — more importantly — wool have hampered earnings growth, particularly in its men’s wear fabric business. Norwood said, “As far as I can tell, no one has been able to totally cover these costs.” She added that Burlington’s solid demand gives the firm an opportunity to cover some of the costs.
Pickler commented that the problem for Burlington is getting buyers to accept higher prices. He estimates Burlington will earn 10 cents a share in the first quarter ending Dec. 31, against 28 cents last year.
The rising fiber prices led Edward Johnson of Johnson Redbook Service to cut his estimates at Cone Mills and Burlington, with earnings further weakened by problems at Burlington’s Knits division. Johnson lowered his estimate to $1.05 for Burlington from $1.25 for fiscal 1995. In the year-ago period, Burlington earned $1.
Analysts estimate Cone will earn 25 or 26 cents a share in the fourth quarter ending this month against 39 cents a year ago. Johnson lowered his estimate for Cone Mills in all of 1994 to $1.20 from $1.40. Last year, Cone earned $1.68.
Norwood said that while Cone Mills, a major denim producer, has had strong demand for denim, costs are up and margins have been hurt from higher cotton prices.
“Cone has not been able to get price increases they would like to cover raw material costs,” she said.
However, Norwood added that with increased demand, good top-line growth and international expansion, Cone is “extremely well positioned for the long term.” Prudential’s Pickler said that denim sales at Cone have been solidly positive this year, but in early 1995, the company will face more margin challenges from increased costs.
Norwood pointed to the impact of increased competition on Thomaston Mills, which also has been unable to raise denim prices to cover the high cost of cotton. The installation of new dying equipment in September cut into production and is expected to drag down results for its second quarter ending in January. The company looks for improvement in the second half of the fiscal year. Analysts’ estimates of Thomaston’s earnings fall in the range of 10 to 15 cents for the second quarter, against 32 cents a year ago.
The dramatic hike in wool prices has hampered worsted wool operations and squeezed margins at Forstmann. Citing these problems as well as higher interest rates, Johnson estimates Forstmann will earn 55 cents in the current year against $1.25 a year earlier. He estimates profits at 80 cents for 1995.
Norwood noted that Texfi’s blended division continues to be sluggish as the mill has suffered from the trend toward casualwear in the workplace. According to Pickler, while20 T-shirt fabrics performance has improved, the gray goods business is “materially below last year.”
Analysts expect Texfi either to break even or lose some money in the first quarter ending in January but look for profitability in the year ending October 1995. Texfi is expected to benefit from an improvement in women’s career apparel market, said Norwood.
Springs Industries experienced solid growth in the latest quarter, aided by price increases in its home furnishings division. Apparel fabrics have advanced along with its other businesses. Analysts estimate Springs will earn 99 cents in the fourth quarter ending in December, against 87 cents last year. For the full year, analysts expect Springs to earn $3.15 against $2.65 last year.
— Fairchild News Service