Profits at US clothiers seen lifted by lower cotton, technology

Mon Feb 11, 2013 4:00pm EST
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By Nivedita Bhattacharjee

Feb 11 (Reuters) - Leading clothing retailers like Gap Inc , American Eagle Outfitters are forecast to report larger fourth-quarter profits in the coming weeks, the latest evidence that smart inventory management and lower costs helped overcome sluggish holiday sales for most in the industry.

For calendar 2013, clothes retailers are expected to see margins improve due to better control of when their products arrive in stores, lower manufacturing costs and smarter use of technology for online sales and price comparisons.

Ken Perkins, president of data-monitoring firm Retail Metrics, expects fourth quarter net earnings at 18 U.S. apparel companies he follows to increase by 18 percent on average. Ten other retailers that sell clothes to teenagers are expected to see a 37 percent average increase in net profit, while the broader group of 120 retailers should see earnings rise 9.5 percent.

Lower product costs, investments in a smarter supply chain that helps manage inventories better, and controlled discounts are what analysts are banking their estimates on.

"Apparel retailers have lower product costs year over year, and most companies came into this quarter clinging on inventory. So even though top-line trends may not have been strong, margins should grow," said Betty Chen, retail analyst with Wedbush Securities.

According to Thomson Reuters estimates, Gap's profit is expected to rise about 34 percent over last year, while margins expand about 3 percentage points. Nike's profits are expected to be up about 8 percent. Abercrombie & Fitch Co, American Eagle and Lululemon Athletica Inc are all expected to post better profits and margins as well. Many others raised profit expectations on Thursday.

"The fact that input prices were significantly lower than last year because of the dramatic drop in cotton prices, and the post Christmas enthusiasm helped on markdowns," said retail analyst Jan Kniffen. "So, despite the only OK Christmas selling season, margins are better than otherwise."

Kniffen said costs of manufacturing were down by about 8 percent this year, while Michael Niemira of the International Council of Shopping Centers pegs the decline at 10 percent to 12 percent.   Continued...