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What it means for retailers and shoppers

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Cotton field

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It was July 2011, when cotton prices reached this level.

“In 2011, an opportunity for prayer was needed.” Levi StraussOn Wednesday’s earnings call, Chip Bergh, Chief Executive Officer, spoke to investors.

Bergh was recalling how he just joined the Levi’s denim store and was still learning. He was looking down, however. a historic surge in cotton prices. Cotton had skyrocketed above $2 a pound, as demand for textiles rebounded from a global financial crisis, while India — a major cotton exporter — was restricting shipments to help its domestic partners.

Jack Kleinhenz (National Retail Federation Chief Economist) stated that the price of cotton T-shirts rose by about $1.50 to $2 on an average. It was felt by the consumers. Companies also suffered as a result.

Bergh is seated in the camp alongside analysts and experts, who believe that the current inflation of cotton prices will not be as damaging to the sector. Both retailers and manufacturers have the pricing power. The higher prices will not be passed on to consumers, but companies will still have the ability to do so.

Bergh said, “It is a very different circumstance today.” We’ve been able take pricing for the past 12 months, and it’s still sticking. … Some of the inflationary pressures we are facing have been priced out.

CottonOn Friday, prices reached $1.16 per kilogram and hit levels never seen since July 7. 2011. It rose by roughly 6% over the week and is currently up 47% for the year. Analysts observe that traders who rush to close short positions are increasing their gains.

Many factors contribute to this run-up. In December 2017, the Trump administration announced its intention to end all government programs. blocked companies in the United States from importing cotton and other cotton productsIt was discovered that the cotton originated in China’s Western Xinjiang area, amid concerns about Uyghur forced labor. This decision, which was in force during the Biden presidency, forced Chinese firms to import cotton from America, produce goods using that cotton in China and sell the product back to the U.S.

Extreme weather, including droughts and heat waves, have also wiped out cotton crops across the U.S., which is the biggest exporter of the commodity in the world. India: deficient monsoon rainsThey could affect the nation’s cotton output.

This dynamic already has a negative impact on shares HanesBrandsThe apparel company known for producing cotton T-shirts and undergarments, is a HanesBrands. HanesBrands stock has fallen as cotton prices rise in the past. Stock fell by 7% in the week to $16.23. Stocks dropped 5% Friday, closing at $16.23.

“Real pricing power”

Michael Binetti, a Credit Suisse analyst said that any concerns or pullbacks in retail stocks due to rising cotton prices are overblown.

Direct cotton purchases account for only 2% of HanesBrands’ total goods cost. In 2012 that number was 6%.

Binetti explained that HanesBrands raised the prices of various goods made of cotton by a double-digit percent three times between 2011 and 2012 in an effort to counter inflation. Despite all its costs, HanesBrands still saw a decline in profits. However, some price rises were maintained by the company. Credit Suisse analyst stated that today the company is healthier and enjoys stronger profit margins.

“We believe that stocks are over-appreciating the strongest dynamic this sector has had for more than 10 years. Binetti spoke of the real price power.

This pricing power has been achieved by retailers who actively avoid discount channels and reduce excess stock. Covid pandemic has acted as a “cover”This shift is important for businesses to speed up. In tightening inventories, ongoing supply chain bottlenecks played an important role. This has led to rising costs, causing businesses to raise prices. However, consumers still buy.

Binetti explained that “we think inventory will stay rational”, margins will continue to be strong, and retailers can push larger and more consistent prices increases than they’ve ever been able for the past decade. Binetti believes that the inflation in cotton will pass.

Robert Samuels from UBS said that retailers who specialize in denim will likely be most hard hit by rising commodity costs. The majority of raw materials for jeans and denim products are made with cotton.

Samuels wrote in a note for clients that “as if retailers didn’t have enough to worry about supply chain constraints or labor shortages”,

The spike can be more severe

Levi already tried to dispel any doubts about its denim-business.

Levi stated in its earnings call that it had already managed to negotiate most of its product cost through the first half next year at low inflation. It expects to experience a rise of mid-single digits in the second half. Levi stated that it will offset the price hike by taking pricing measures already in place.

Levi is moving its wholesale business away from being a primarily wholesale company to becoming a mix base with a greater share of direct sales. Due to increased consumer demand and tightened inventory, Levi has been able increase its sales at the full price.

Harmit Singh, Chief Financial Officer, stated that cotton accounts for around 20% of the total cost of making a pair Levi’s Jeans. Each pair contains approximately two pounds of cotton.

Levi was the first retailer to publicly comment on rising cotton prices due to its timing for the earnings call. In the weeks ahead, others will release fiscal third-quarter results.

Goldman Sachs analysts believe that it may take some time before rising costs of cotton start to appear on income statements for retailers, due to the timing and purchase dates of cotton contracts. Not to be overlooked is the fact that cotton prices soared past $2/lb in 2011, which is significantly higher than where it is currently trading.

As higher prices continue to persist, however, apparel stocks could be subject to some pressure. An analyst cited the following companies as examples: Ralph Lauren Gap Inc. Kontoor BrandsCalvin Klein Owner PVHThis is a. Kontoor Brands’ shares fell almost 6%, while PVH and Gap saw their stock fall less than 2 percent.

—CNBC’s Michael BloomThis reporting was contributed by you.

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