Cotton's march past $1 a pound will prompt many apparel makers and retailers to mitigate the extra manufacturing cost with price increases, despite continuing signs of belt-tightening among consumers.

Price increases are a "tool everyone will implement," said Kenneth Stumphauzer, a Sterne, Agee & Leach analyst.

Uncooperative weather in key cotton-producing regions has squeezed inventories since the beginning of the year. Prices rose as cotton fields flooded in Pakistan, and heavy rains in China, the world's No. 1 grower and importer, threatened planting acreage and the harvest. Export quotas in India and Brazil only exacerbated the supply issues.

Yet certain companies will be able to shoulder higher cotton costs more easily than others.

Those, like Gildan Activewear Inc. (GIL, GIL.T) and Hanesbrands Inc. (HBI), that manufacture such all-cotton products as socks, T-shirts and underwear will have less wiggle room in their cost structures. Others, like VF Corp. (VFC) and Warnaco Group Inc. (WRC), manufacture clothing with man-made fiber and cotton blends and may not face the same pressures.

For Gildan, whose signature products include blank cotton T-shirts, the commodity is a larger component of costs than it is for some of its peers. When cotton hovered around 65 cents a pound, it represented about a third of Gildan's cost of goods sold, Chief Financial Officer Laurence Sellyn said. As cotton prices rise, that portion will increase.

The company raised prices through its wholesale channel in July and again in September, a cumulative bump of about 6%. Sellyn confirmed that price increases in the second half of fiscal 2011 are "realistic" if cotton stays at current levels.

Still, Gildan may be better poised to handle cost increases due to its lower overhead for labor. The company has manufacturing sites in Central America and the Caribbean basin, which helps it duck the panoply of woes facing Asian manufacturers: currency and wage increases, labor shortages and high transportation costs, among others.

Moreover, Gildan has locked in cotton prices six to nine months in advance, so its costs don't reflect current cotton prices. The company set prices for the upcoming December quarter at just below 80 cents a pound, and targets March-quarter prices in the low- to mid-80-cent range.

As for Hanesbrands Inc. (HBI), cotton makes up a little more than 10% of its cost of goods sold and contributes to about 7% to 8% of sales, according to Sterne, Agee's Stumphauzer. The company will have to implement a price increase of 2% to 3% to offset the rising cost of cotton, he said, and won't get pushback from retailers.

The company wasn't immediately available for comment but in July said that, due to high cotton, energy and labor costs, it would raise prices in the third and fourth quarters of 2010, with the majority of price boosts beginning in 2011.

On the retail side, Abercrombie & Fitch Co. (ANF) may not be able to deal with price increases as gracefully as others. Its eventual concession to mark down clothing was a boon for sales in the recession, so reverting to higher prices won't likely be the company's impulse fix-it for high cotton costs. Still, cost cuts over the past year may help.

Given Abercrombie's "clout," it likely won't use cheaper fabrics and therefore risk quality, said Robert Samuels, an analyst at Phoenix Partners Group.

The coup de grace could be cotton prices' eventual reversion back to the mean, with near-term prices possibly returning to a low-90-cent range. High prices in September are "extraordinarily rare literally right in front of the harvest," said Sharon Johnson, a cotton analyst at First Capitol Group in Atlanta. With about 747,000 bales picked and ginned, U.S. production is already about two to three times higher than in the three previous years, and a month from now supply will look "very, very different," said Johnson.

-By Rachel Rosenthal, Dow Jones Newswires; 212-416-2263; rachel.rosenthal@dowjones.com
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