New York -- Lower cotton costs will boost the earnings of US retail apparel companies during the coming back-to-school season, according to a report by Moody's Investors Service.
The report, "Back to School: Lower Cotton Costs, Gas Prices Set Stage for Higher 3Q Earnings,” notes that for the third quarter overall, Moody's expects the apparel-makers' growth in earnings to outpace their growth in sales.
"The benefits of lower cotton costs will be evident in the second half of 2012, and this should enable apparel companies to recapture a meaningful portion of the gross margin lost last year when input costs were higher," said Scott Tuhy, a Moody's VP and senior credit officer. "We expect to see positive operating-earnings trends starting in the back-to-school season, with those companies with meaningful sales in the children and young adult categories benefiting most, along with companies that sell cotton-intensive products."
Apparel-makers likely to benefit most include The Gap, Ascena Retail Group Inc., Hanesbrands Inc. and Levi Strauss & Co. Moody's also expects the discounters Target Corp. and Wal-Mart Stores Inc. to benefit as consumers remain cautious and look to save.
Moody's expects a 2% to 3% increase in third quarter sales for the apparel and specialty-apparel companies that it rates but an 8% to 10% growth in operating earnings.
In the third quarter of 2011, Moody's-rated apparel retail companies saw their sales rise about 10% compared with third quarter 2010, but operating earnings were essentially flat, as operators were unable to pass through higher input costs, most notably cotton.
Cotton prices peaked at over $2 a pound in 2011. Since then they have fallen over 60% and cotton prices are currently trading at about 70 cents a pound.
Lower gasoline prices will also help back-to-school sales, giving consumers a few more dollars to spend on their children's clothes, says Moody's.
The back-to-school season, which lasts from late July to early September, is an important time for apparel retailers. August is the third largest month for sales of clothing and related products, trailing only November and December, which benefit from holiday sales.