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Business & Financial

Profits Head Higher

Robert S. Reichard, Economics Editor

Textile World 's earlier predictions for a tolerably good 2012 are holding up fairly well, with the domestic textile industry still expected to sport some solid bottom-line gains. Recent quarterly earnings reports would seem to confirm this upbeat assessment. Ditto, new projections by Global Insight, a top U.S. economic forecasting firm, whose analysts, using their rough estimate of profits, also suggest the recovery will be broadly based, encompassing all three key subsectors of the U.S. textile/apparel complex. In the basic textile sphere, earnings are expected to jump close to 50 percent over 2011, when skyrocketing cotton costs adversely affected bottom-line performance. And this strong uptrend should continue into 2013, when an even larger advance is projected.

A basically similar picture is seen for fabricated mill products such as rugs and home furnishings — with big double-digit 2012 and 2013 earnings advances expected. Indeed, even the United States' hard-pressed apparel industry is expected to show some fractional improvement over these two years. And profit margins aren't faring too badly either. The latest numbers here, culled from a just-released government report, show textile mills reporting a 3.5-percent after-tax return on sales — well above the 2.4-percent recorded 12 months earlier. And in the apparel sector, the latest 8.1-percent return remains unchanged vis-à-vis early 2011. The margin story is much the same when it comes to profits per dollar of stockholders' equity, where returns are also a bit above year-earlier levels.

BFgraph

Some Other Encouraging Signs
Another positive note: Global Insight's textile and apparel projections haven't changed all that much, despite some recent downgrading of the 2012 macroeconomic outlook. Put another way: Lower near-term gross domestic product gains — now put in the 2- to 2.5-percent range – aren't expected to have any appreciable impact on profit performance. What makes this even more upbeat is the fact that many other domestic industries are now hinting that their earnings have peaked, or are about to peak. Even more significant: Go further out into the future, and textile and apparel forecasts still are expected to remain in the plus column. Global Insight, for example, anticipates additional profit improvement in the 2014-2016 period for both basic and fabricated mill products — although the actual advances are put in the more moderate 2- to 4-percent range. Apparel increases are also expected to continue. True, only minimal 1- to 2-percent annual gains are expected here. But whatever the increases, all these numbers look a lot better than those recorded over the past few years, when profit declines were outnumbering increases by a wide margin.

Behind The Optimism
More importantly, today's essentially positive profit outlook is based on more than just wishful thinking, as tolerably good consumer demand and relatively unchanged production costs make major contributions to bottom-line strength. On the demand front, both basic and fabricated mill product output and shipments — adjusted for inflation — are expected to remain relatively stable or hopefully even inch up a bit over the next few years. To be sure, apparel activity could buck the trend and edge lower. But any sales declines in this latter sector will be far less than those recorded over the recent past. Equally important, as just noted, mill production costs are highly unlikely to present any major problems. Raw material tabs, for one, are being held in check by the recent big drop in cotton quotes. And there's little to indicate that this key fiber won't remain near current low levels through the foreseeable future. Nor are man-made fiber costs likely to hurt the industry. True, quotes are up a few percentage points vis-à-vis a year ago. But here, too, things should soon be looking a little better — reflecting both ample or more-than-ample capacity, and recent sharp declines in petroleum-based feedstock costs. And, last but not least, there's the question of wage costs — a far-from-insignificant factor in the United States' labor-intensive industry. Here, too, the outlook is rosy, as any pay increases that do occur are offset by continuing productivity increases. In short, no major problems are anticipated. Indeed, barring the unexpected, the U.S. textile and apparel industries should more than hold their own — today, tomorrow, and probably well into the future.

July/August 2012

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