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Business & Financial

A Brighter Earnings Picture

Robert S. Reichard, Economics Editor

More good news on the textile and apparel profit front: New, updated estimates by Global Insight, a leading economic forecasting firm, suggest continuing strong bottom-line performances — not only for the current year but also into 2015 and 2016. Using the firm’s rough approximation of profits — shipments less raw material and labor costs —this prestigious consulting outfit sees earnings in the basic textile sector — fibers and fabrics — rising about 1.5 percent this year. Add in the much larger increases of 2012 and 2013, and 2014 earnings should be more than double their 2011 level — not bad for an industry that was supposedly on the ropes a few years ago. And it’s pretty much the same story when it comes to more highly fabricated mill items like carpets, home furnishings and industrial-type products. The projected gains here are 7 percent for the current year and average 5-percent-plus advances for the following two years. Nor are things all that much different in the downstream apparel sector, where a hefty 50-percent-plus leap is anticipated for 2014, with further — albeit much smaller — increases seen for the next two years. Making these gains even more encouraging is the fact that they’re considerably greater than projected increases in textile and apparel industry shipments. That’s pretty strong evidence that these industries are becoming a lot more cost-effective.

Solid Margin Improvement, Too
This increasing cost effectiveness can probably best be measured by zeroing in on another profit yardstick — after-tax profits per dollar of sales. While final 2013 numbers for this equally important barometer are not yet in, all the evidence here points to a continuation of increases noted over the previous year. Indeed, it now looks like this “margin” measure for all textile mills — basic as well as those making more highly fabricated products — jumped to near 4.5 percent in 2013. That’s a fairly solid improvement over the 3.7-percent reading noted for the previous year. And pretty much the same pattern is seen for domestic apparel manufacturers: a 9- to 10-percent return on each dollar of sales for 2013 versus the 8.3-percent return reported for the previous years. Note, too, that a similar pattern is seen in still another widely monitored profit margin yardstick: Profits per dollar of stockholders’ equity. The past 12 months’ increase here has been equally upbeat — with this measure of rate of return on invested dollars estimated at somewhere in the 10-percent-plus range for textile mills, and double that —nearly 20 percent — in the case of clothing manufacturers. These returns on equity are especially impressive when compared to the relatively low percentage-point returns currently available for other types of investment. And they’re not all that different than returns recorded in most other U.S. industries. Bottom line: There’s still plenty of incentive to invest in U.S. textile and apparel firms.
Behind The Gains
All these bullish profit numbers can be attributed to a combination of positive developments. First, there’s the absence of any upward labor and raw material cost pressures. This factor is especially important, as these expenses make up the lion’s share of both the textile-mill and apparel-maker sales dollar — about two-thirds in the case of mills and more than 80 percent for clothing manufacturers. And these favorable cost patterns aren’t expected to change much over the next year or two. Meantime, another key factor contributing to healthier bottom lines is the U.S. domestic industries’ steadily rising productivity. Over the past decade, for example, industry observers say efficiency gains have averaged out at nearly 3 percent a year. And, based on continuing investment in new state-of-the-art plant and equipment, there’s every indication that this impressive productivity trend will continue. Indeed, textile capital spending has actually accelerated over the past few years — with totals at last report topping the $1.2 billion-per-year level. A number like this clearly suggests that both efficiency and profits will keep rising. Meantime, yet another factor helping to buoy earnings is the changing mix of domestic products. More and more domestic firms — finding it hard to compete in commodity-type items — are turning to niche markets, where they generally excel and where profits tend to be more robust. Finally, add in growing consumer preference for Made in USA products and the trend toward reshoring — discussed in previous columns — and the United States’ latest earnings and margin projections — for both textile and apparel — appear to be increasingly attainable.
April 2014


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