Letter From SanMar – Update on Cotton Costs

[Reprinting of letter from President of SANMAR on current situation of cotton market]

August 10, 2011

Many of us have spent the last several months following the wild ride of cotton prices – from lows of .65 cents per pound a year ago to recent highs this year of $2, to pricing recently of $1. Not surprisingly, we are receiving lots of questions from customers about when prices are coming back down to match the decreasing price of cotton. The cynical ones out there (I usually consider myself part of that group) assume that while cotton costs have gone down, prices won’t go down so we can gouge you a bit and pad our margins.

The truth is that the world of sourcing is really complicated and many factors go into the cost of our products. Costs continue to fluctuate and be impacted by a number of factors, including

• Increasing labor costs around the world,
• Pressures on the value of the U.S. dollar,
• Cost of other inputs such as power, electricity, bunker oil, transportation, dyes and chemicals, and
• Recent inventory build up of high-price cotton throughout the manufacturing and distribution channels here and abroad.

On top of this, we have vastly different vendors who buy and manufacture in very different ways, which affects the timing of when prices for certain products go up and down.

Gildan and Nike, for instance, have very little in common in how they bring products to market. Nike locks in long term pricing with suppliers so they can commit a season’s worth of pricing to their retailers. This has allowed us to hold our Nike prices through the recent run up in costs. As Nike locked in prices for the coming retail season, their factories raised prices based on increased manufacturing costs, and in January we will need to raise our Nike prices as well.

Gildan, who has taken 5 price increases in the past year, is much more sensitive to short term changes in the price of cotton, so they manage these costs themselves by purchasing forward contracts that essentially lock in cotton costs many months in advance of production.

Simply said, the cotton that Gildan is buying today won’t be used in their products for many months and as a result, we don’t expect immediate decreases in prices from them. The cotton currently in their factories they estimate at approximately $1.60 per pound, and we expect much of our current purchases today to be priced using this cost.

We are working hard together with Gildan and other t-shirt vendors to eliminate, or at least moderate, the need for any additional price increases. We believe this is necessary to help stimulate demand in the market as well as to soften the variability in prices over the next months.

So what did Marty tell me?

It’s really a mixed bag. Next January, when we launch our 2012 full-line catalog, you should expect some prices still rising with other prices decreasing. It’s hard to say yet how many, which products, or even the magnitude, but we are aggressively working with our vendors (both private label and others) to roll back some of the increases we took last year. Our guess is more down than up, but hard to quantify at this time.

The most important thing is that we are all living in a pretty volatile world (easy to see with the recent stock market craziness), and I want to make sure we are updating you on what we know, when we know it.

One final note is that SanMar recently completed our first Corporate Social Responsibility Report. View by clicking here. We believe that our commitment to doing business in ways that are socially responsible are even more important during times of increased cost pressures, so I believe this report is very timely. We are proud of the steps we are taking in this area and especially our full participating membership in the Fair Labor Association.

As always we appreciate your business and I look forward to seeing you on my travels.

Sincerely,

Marty Lott
President SANMAR