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Just When You Thought These Retailers Were Safe

Jacob Roche
March 8, 2012

Just when it seemed as if the price of cotton was heading down and clothing retailers could get back to the important business of style rather than the tedious business of product costs, India goes and drops the hammer on the cotton market. On Monday, the Indian government announced that it will immediately and indefinitely ban all cotton exports, including shipments that had already been scheduled but not yet shipped.

Not this again
Around this time last year, clothing retailers were struggling to survive after the price of cotton had nearly tripled in just one year. Despite a long drought in Texas, where much of the United States' cotton is grown, prices fell by more than 50% throughout the year. The United States is the world's biggest cotton exporter, but the trouble here was outweighed by what is projected to be a record harvest in Australia and softening global demand.

Unfortunately, apparel companies buy their supplies several months in advance, so they were still digesting the high prices of the spring well into fall, just in time to concede their margins again, this time to the discount-heavy holiday season.

That's why only a handful of apparel companies have seen their margins recover, and only barely. Some companies, like VF (NYSE: VFC  ) , chose to protect their margins by raising prices, but because of the weak economy, that strategy proved hard to pull off. In VF's third quarter, the company reported that gross margin had slipped 1.2 percentage points, entirely because of its jeanswear business. Jeanswear revenues were higher in that quarter, but only because of price increases -- actual pairs sold were down.

In more competitive spaces like teen retailing, the damage has been severe. Aeropostale (NYSE: ARO  ) and American Eagle Outfitters (NYSE: AEO  ) have both struggled to sell bloated inventories that were expensive to build in the first place, and their margins have suffered greatly.

Bumper crop, or just bumpy ride?
Despite falling in price all last year, cotton is still twice as expensive as it was just three years ago. Crop analysts believe that current supplies are fairly high, and Australia is forecasting another record crop this year, which may indicate further drops in price.

At the same time, however, the Chinese government recently raised the price it pays domestic cotton farmers far above the going market rate, indicating increased demand from the world's largest cotton importer. But it also seems China might just be stockpiling the cotton, which has some worried that they will eventually release it back into the market