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Apparel retailers’ bumpy profits will get a cushion next year — a cushion made of cotton.
Earnings at clothing chains like Gap, American Apparel and Abercrombie & Fitch got squeezed last year, as cotton prices spiked to historic highs amid flooding in producing countries like Australia, India and Pakistan.
But prices have tumbled 30 percent during the past 12 months as global production has soared while a shaky economy has sapped demand.
China, the world’s biggest cotton buyer, lately has curtailed purchases in a move that’s expected to tank prices even further.
“My fear is that without China as a big buyer in international markets, prices will crater further,” says Andy Ryan, a senior analyst at INTL FCStone.
The New York-based commodities firm forecasts that cotton futures over the next 12 months could fall to between 60 and 65 cents a pound — as much as 20 percent below current trades around 75 cents for next-month deliveries.
Thus far, retailers have remained mostly mum on forecasts in light of the falling prices, which as soon as next spring will ease their costs for producing everything from T-shirts to jeans.
Clearly, the price drops are good news for chains like Abercrombie, whose gross margins plummeted last year by more than 3 full percentage points as cotton futures spiraled upward.
Nevertheless, it’s no cinch that retailers can sew up profits if consumer spending remains lackluster, says Liz Dunn, an analyst at Macquarie Capital.
“If cotton prices are falling further because of weak demand, that’s not such a good scenario” for retailers, Dunn says. “If sales continue to be weak, they’ll have to give those savings back to consumers.”