Another Day, Another Industry Facing Stagflation

sewing clothes apparel factory clothing

Another day, another industry being asked to cope with rising input costs and saggy demand.

JPM analyst Chris Kim brings us the latest from the apparel makers.

While both top line and margins for the group continue to come in ahead of expectations, concerns about rising input costs and an expected shift in demand at retail are weighing on valuations. Given these margin pressures, we believe that top-line visibility will be increasingly important as we head into the 2H 2010. The big question, in our view, is whether a negative earnings revision cycle is upon us as we attempt to quantify the impact of these headwinds.

 Product costs . . . the #1 question we are getting. We estimate that the combination of increases in raw material prices, labour, and freight could translate to a 5-7% impact to the cost of goods for 2011. While inflation is a reality (at every step from factory to retail), manufacturers continue to battle these increases with shifting manufacturing to countries with lower costs, product engineering, and placing orders earlier in the season.

As for sales…

Strong top-line results, but trends at retailers appear shaky. Despite the relatively strong global trends, we are beginning to see a deceleration in the overall comp run rates, similar to the specialty retailer group. We think that the current restocking environment could be a short lived phenomenon as we expect retailers to maintain a very conservative stance on inventory investments.

Don’t miss: several more signs of stagflation >

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