TOUGH CHALLENGE FOR MILLS
Byline: Scott Malone
NEW YORK — Textile mills still face a big mountain before they are firmly on profitable ground, but at least they’ve started on the arduous climb.
While red ink continued to dominate the palettes of mill accounting departments in the fourth quarter of 1999, the losses weren’t quite as steep as they were a year ago. Analysts expect the story to be much the same in the first quarter, which for many companies has just ended: bottom-line improvement, but not necessarily profit.
But mills are still meeting obstacles on the road to recovery. On Monday, Burlington Industries Inc. said it expects to miss analysts’ estimates — though still post a profit — for its second fiscal quarter, ended April 1.
Analysts had been expecting the company to earn 8 cents per share. At the close of trading Monday, three of the five analysts covering the company had lowered their estimates to an average of 2 cents, according to First Call.
But it’s an improvement: In the prior-year quarter, the company posted an 86 cents-per-share loss, after taking heavy restructuring charges.
The company blamed the expected earnings shortfall on complications resulting from downsizing apparel-fabrics manufacturing and soft denim pricing.
“Although we continue to make good progress in the apparel-fabric restructuring that we initiated a year ago, it is taking us longer to settle the operations down and attain the forecasted efficiency and quality levels,” said chairman and chief executive officer George W. Henderson 3rd, in a statement. “The larger effect on earnings, however, comes from highly competitive denim pricing due to worldwide industry overcapacity.”
Burlington also said it expected results for the year to miss analysts’ expectations by 30 to 35 percent. For the year, three analysts who revised their estimates Monday lowered them to an average of 42 cents from 64 cents.
While Wall Street hardly reacted warmly to the news — on the New York Stock Exchange, Burlington shares fell 7/16 to close at 3 15/16 — analysts said it appeared the problems were due to a temporary stumble on Burlington’s part, rather than a sign of a significant downturn in the denim market.
“I hate surprises, but it really doesn’t sound that bad,” said Kay Norwood, analyst at Wachovia Securities Inc., in an interview Monday. “Overall, it sounds like things are really improved. It’s not so much the absolute price of denim as it is that their average price of denim is being affected by off-quality and lower efficiency rates than they would like to see.”
Norwood said that the company reported some positive news for the denim business: It has successfully passed through a sizable denim price hike at its Indian joint venture, Mafatlal Burlington Industries Ltd. While that doesn’t immediately affect its Western Hemisphere denim operations, she continued, “Eventually that will get here. Certainly they would not be able to do that if conditions weren’t right.”
She said that she didn’t think Burlington’s announcement meant that the two other big denim producers — Cone Mills Corp. and Galey & Lord Inc. — were necessarily faring worse than expected. Norwood expects Galey to report an improved bottom line for the first calendar quarter of 2000, though she expects Cone’s results to slip for that period.
Prudential Securities analyst Jack Pickler on Monday said he wasn’t entirely surprised to learn that it was taking Burlington more time than originally expected to complete its restructuring.
Last year, the company announced that it was closing seven plants, cutting its apparel-fabrics workforce by 25 percent and exiting the knit fabrics business. The company reported that it closed the last two of those seven plants in March.
Said Pickler, “That was a very large project and had a lot of moving parts, and if things don’t go along as quickly as planned, then that happens.”
Overall, analysts said they’re expecting results to improve for the first three months of 2000.
That would build on the momentum of the fourth quarter of calendar 1999. A WWD survey of 12 top publicly traded apparel-textile companies showed narrowed losses, though the group did record its fifth consecutive quarter in the red.
As a group, the companies reported a collective $6.9 million net loss in the fourth quarter of 1999. That is narrowed from a $14.8 million loss reported in the fourth quarter of 1998. Sales for the group were $1.93 billion, down 5 percent from $2.03 billion.
Within the group, seven companies recorded improvements to their bottom lines, while five experienced declines. There was an even split between profitable and unprofitable companies.
The group is smaller than it was when third-quarter results were reported. Texfi Industries, which in February filed for Chapter 11 bankruptcy protection, is no longer included on the list.
Observers attributed the narrowed losses partly to a slight improvement in overall market conditions. Over the last year, the economies of the Far East have substantially recovered from the depths of their economic crises, and the tsunamis of fire-sale-priced imported fiber, yarn, textiles and apparel, which pounded American mills in 1998 and early 1999, are now no longer as frequent or as large.
Equally important to some observers is that many companies have adapted to the difficult market conditions that prevail.
“Something that I saw in the fourth quarter that I think will be even clearer in the first quarter is that the mills have adjusted to lower manufacturing rates,” said Prudential’s Pickler last week. “That has resulted in a little bit better margins and better profitability than we might have imagined, given the level of sales.”
These changes have come on two fronts. First, mills have trimmed costs internally. But they’ve also reconsidered what they’re selling, stepping up their efforts on proprietary, higher-margin products and backing away from price-pressured commodity merchandise.
“Most of it is cost-related,” he said. “It’s reducing people, reducing programs, some nondirect product costs, but also [focusing on] their most profitable mix.”
Pickler said he expects these changes to continue and, as a result, expects mills’ financial results to look better in the first quarter.
“They’re going to be encouraging. I don’t expect the sales to be through the roof, but I do think profitability will be better,” he said.
However, acknowledging the heavy losses that many companies have been taking recently, he added, the best some companies can hope for is a smaller loss.
While Burlington’s stumble on the denim front was not entirely expected, that business did experience an overall downturn in the fourth calendar quarter. Observers said they believe that downturn was a temporary phenomenon.
“The December quarter was an inventory-correction quarter,” said Wachovia’s Norwood, in a telephone interview last week. “But it did appear to be one of those one-quarter events.”
Galey & Lord ran its denim mills at full capacity through the fourth quarter, according to analysts, and at the mill’s February annual meeting, executives said they were still running full. Analysts said Burlington and Cone did not run full through the quarter.
Nonetheless, some analysts said that the pickup in demand for denim fabric — which they largely attributed to Levi Strauss & Co.’s sorting out of its own inventory problems — will boost denim mills’ results in the first quarter and beyond.
“The manufacturing rates are much, much better” in the first quarter, said Prudential’s Pickler. “The pipeline as it relates to Levi Strauss has improved significantly.”
But not all observers agreed.
“There’s always a seasonal pickup at this time of year,” said Bryan Hunt, analyst at First Union Capital Markets. While, in percentage terms, the pickup is greater than it has been in recent years, he said that he still expects overall year-to-year denim volume to be down.
“Comparing the first quarter to a year ago, business is not going to be any better,” he said.
Makers of synthetic fabrics continue to be pressured by the rising cost of man-made fibers. The surge in oil prices has prompted fiber companies to hike their rates on polyester, nylon and acrylic — most recently DuPont kicked off a fourth round of polyester staple price increases. Mill executives say that they’ve been forced to accept some degree of price increases — though not necessarily as much as the fiber companies have wanted or as quickly as they’ve wanted it — but had not been terribly successful in passing along the increases.
Analysts said at this point, it’s unclear what effect this is having on results, though they said they believe mills are doing all they can to avoid accepting the hikes.
“Fiber companies raise prices and you can’t pass it through. Then you go looking for a cheaper place to buy fiber. Somebody out there will always make a deal,” said Wachovia’s Norwood. “I haven’t seen any numbers that were blamed on an inability to pass higher costs on, but when we look at the March quarter, it may be a little different.”
The continuing slump in mill results has most textile stocks trading at very low levels for businesses that are so capital-intensive. Most recently, this has resulted in the New York Stock Exchange telling Dyersburg Corp. that it plans to de-list its stock by Thursday
The slump has also caused a number of groups to increase their holdings in mills and try to take a more active role in what becomes of these businesses. Over the past year, a group of investors affiliated with Summit Capital Corp. have built a 13.7 percent stake in Cone, made an effort to take the firm private and, when that was unsuccessful, landed two seats on the board. Worldtex Inc. last week entered into an agreement with EGS Partners — which had acquired a 34 percent stake in the company — to prevent it from trying to acquire more Worldtex stock or make any shareholder proposals. (For a related story, see page 11.) Also last week, an investor with a 0.6 percent stake in Fab Industries Inc. succeeded in getting a proposal on the company’s proxy that Fab consider selling or liquidating itself.
“Fringe groups like that, without considerable capital behind them, have not had great success at forcing changes,” said Prudential’s Pickler. But while analysts agreed that, without deep pockets, renegade investors rarely succeed in changing corporations’ direction, there was some disagreement on how likely it is that the textile industry will catch the interest of well-heeled financiers.
“This kind of market will do it to you,” said Wachovia’s Norwood. “I sit here and watch tech stocks go up more in one day than some of these companies’ market value. But going private or liquidating is not the solution to it. The solution for companies is to forget the market. The market will take care of itself in due time. Liquidation or limited-buyout offers are not the way to go.”
Pickler disagreed, noting that last month, the board of home furnishings textile manufacturer WestPoint Stevens Inc. approved a limited buyout offer made by Holcombe T. Green Jr., the company’s chairman and chief executive officer.
He suggested that could set off a wave of such moves — it would not be the first, as last year Concord Fabrics Inc. succeeded in taking itself private.
“If you go back to the Eighties, there were a number of recapitalizations and LBO offers by management and venture-capital, private-equity firms,” he said. “If those groups begin to take notice and take some of the winnings from the dot-coms and devote them to this industry, that would be a trend worth following.”
Regardless of what happens with textile stocks, analysts said they expect that overall textile results will improve in the first quarter, largely because of the easy comparisons with last year.
Outside the denim business, Norwood said she expects Dan River Inc.’s apparel-fabrics operations and Delta Woodside Inc.’s mill operation to post better results, with Guilford coming in even with last year.
“I think it’s going to be better,” she said of the first-quarter financial results for the apparel-textile sector. “It will be hard for it to be worse.”