Textiles Monitor December 2013

GREAT AMERICAN GROUP
ADVISORY & VALUATION
Textiles and Apparel Monitor
SERVICES
December 2013 - Volume 12
In this Issue:
Introduction 1
Overview 2
Recent Appraisal Trends 2
Monitoring Points 3
Pricing Trends 4
Reference Sheet 7
Monitor Information 8
INTRODUCTION
While overall economic growth has been less
than impressive in 2013, cautious optimism
persists in the textiles industry. Possibly the
most important development in the domestic
textiles market has been the narrowing of the
gap between U.S. and Chinese production costs.
According to a recent study by the Boston
Consulting Group, the gap between U.S. and
Chinese production costs will decline to only
5% by 2015. The waning cost gap is due to
rising pay among Chinese workers and the
declining cost of U.S. energy based on domestic
gas and oil fracking innovations. Boston
Consulting Group also predicts that American
production costs will be between 8% and 18%
lower than those of major industrial countries
such as Germany, Japan, the U.K., France, and
Italy.
Trend
Tracker
Textiles
Apparel
NOLVs
Consistent
Mixed
Sales Trends
Increasing
Increasing
Gross Margin
Consistent
Consistent
Inventory
Increasing
Increasing
Pricing
Mixed
Mixed
Market Prices
Commodity
Quarter
Year
Cotton
Decreasing
Increasing
Synthetics
Decreasing
Consistent
Recent figures suggest that after-tax profits in
the U.S. textiles industry for the second quarter
of 2013 totaled $505 million, which is a 31%
year-over year increase. Within the textile mills
segment, after-tax profits as a percentage of
sales climbed nearly 5% versus the second
quarter of 2013, indicating higher margins.
NOLVs
 Textiles: NOLVs were consistent based on
Economic consulting firm Global Insight
estimates that earnings for textile mills will be
up approximately 75% in 2013 compared to
2012. However, 2014 is likely to see far more
modest improvement of between 2% to 7%
from this year. It is also likely that the textiles
industry will at least keep pace with the overall
state of the economy. However, major
advancement is unlikely. With the cost of
materials and energy likely remaining relatively
consistent, production per employee rising, and
import levels flattening, the domestic market is
poised to remain stable in 2014.
particularly within the home furnishings sector.
 Apparel: Sales increased due to better domestic
demand and company-specific factors.
offsetting factors, including higher demand and
inventory levels and flat gross margins.
 Apparel: NOLVs were mixed based on
company-specific factors.
Sales Trends
 Textiles: Sales increased due to higher demand,
Gross Margin
 Textiles and Apparel: Gross margins remained
consistent due to flat raw material prices, as
recent declines had not yet impacted margins.
Inventory
 Textiles and Apparel: Inventory increased due
to higher demand from customers, in addition to
company-specific factors.
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OVERVIEW
The adjacent figure illustrates the producer price index,
which denotes the selling prices received by domestic
producers for their output, for textile mills versus textile
product mills. Textile mills include a variety of processes
such as yarn spinning; primary textile products
manufacturing; intermediate yarn processes such as carding,
combing, texturing, twisting; fabric and thread weaving and
braiding; and production of nonwoven fabrics and textile
finishing for both cotton and synthetic fibers. Textile
product mills include carpet and rug mills; curtain and
drapery mills; various household textile product mills;
canvases; cordage mills; and other downstream textile
processes and products.
Producer Price Indexes
Textile Mills versus Textile Product Mills
November 2012 through October 2013
129.0
128.5
128.0
127.5
127.0
126.5
126.0
125.5
125.0
Textile Mills
Textile Product Mills
RECENT APPRAISAL TRENDS
TEXTILES
GA has witnessed NOLVs for textile companies largely
holding steady in recent months, with minor fluctuations as a
result of specific occurrences at individual companies. The
overall revenue trends were mostly positive, with some
companies referencing slightly improved consumer demand
as the reason for the uptick and others pointing to the
improved home-building, construction, and renovation
markets; these factors also resulted in increasing inventory
levels. With input costs fluctuating less than prior years,
those large swings in gross margin of appraisals past have
had less of an impact this year, and indeed this most recent
quarter.
As always, even in relatively stable markets, individual
companies have occurrences and shifts unique to them,
which can have a meaningful impact on NOLVs. The age of
a company’s inventory, the levels of slow-moving inventory,
or overall mix can shift quickly, and these metrics should
continue to be monitored.
APPAREL
GA has appraised a number of apparel companies in recent
months, and while swings in NOLVs were modest, within
two points of those from the prior appraisal, the overall
outlook was largely positive, as GA witnessed some sales
trend improvements in the double-digits, particularly with
companies in the industrial or specialty apparel markets.
The fluctuations GA witnessed were driven largely by specific changes at these companies, often related to the age or
velocity of inventory. While it depends on the end-market
being served, apparel can often be an industry where the age
of inventory can change quickly based on factors such as
consumer preference. Due to product introductions and
upticks in consumer demand, GA observed rising inventory
levels among apparel companies in the third quarter.
Domestic suppliers of apparel, especially consumer apparel,
often have large concentrations of sales within a few top
customers. These relationships should continue to be monitored, as any deterioration can have a substantial impact on a
company’s NOLVs.
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MONITORING POINTS
Monitoring Point
Impact
Monitor current input costs such as Depending on the cost methodology of a company, including the frequency with which it
cotton, polyester, and nylon versus updates standards, the spread between the cost of inventory and current market prices can
lead to large swings in the value of the underlying collateral. Currently, prices remain
the current cost of inventory.
relatively low, which could result in gross margin expansion in the coming months.
Monitor international markets and A variety of international concerns may impact demand and pricing within the textiles
their impact on the domestic textile industry. Most recently, issues over the conditions of international apparel operations have
surfaced, which could impact demand for domestic apparel. In addition, the slowing
industry.
progress of the Chinese economy has impacted demand and market pricing for textile
products.
Monitor gross margin and pricing to Increases in pricing can often take a quarter or longer to take effect, while rising input costs
customers.
take effect more quickly, especially for producers earlier in the supply chain, such as fiber
and fabric producers and yarn weavers. This lag leads to compression in gross margin and
declining recovery values for finished goods. As stated, recent declines have lessened the risk
of such margin shifts.
Monitor downstream and upstream Market factors, such as improved retail activity, higher production levels, and lower overseas
activity, as well as production
inventories, could relieve pricing pressures on inputs such as cotton, while continuing to
capacity and export demand.
drive up the cost of oil-based synthetics.
Monitor weeks of supply and
inventory aging.
Despite increased production and upticks in consumer demand, companies may continue to
carry inventory with high weeks of supply, which would maintain minimal demand.
Monitor oil prices.
As the major feedstock for the majority of synthetic fibers, increases could negatively impact
gross margins for polyester producers.
Monitor weather conditions for
cotton crops.
Should cotton growers experience poor growing conditions, it could result in a lack of supply,
driving up cotton prices. Conversely, improved weather conditions could result in
oversupply, which would drive down prices for cotton.
Monitor inventory levels and
inventory mix.
Factors such as inventory levels and inventory mix are often unique to specific companies,
but industry-wide trends may emerge, which could significantly impact companies’
performance.
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PRICING TRENDS
COTTON
As stated, the cost of materials, cotton included, is expected
to remain relatively consistent in the coming year. Supply,
while lower than last year, remains relatively high, creating
little impetus for price surges in 2014. Cotton prices have
shown a gradual downward slope since averaging $0.93 per
pound on the Cotlook “A” pricing index in June, falling to
an average of less than $0.90 per pound in October. By early
December, the Cotlook “A” index fell to approximately
$0.86 per pound.
While U.S. raw cotton production declined from 3.8 million
tons last season to only 2.9 million tons for 2013-2014,
overall world stocks—a measure of production versus
consumption—are estimated to total 1.7 million tons, down
from 3.2 million tons in the prior season.
As mentioned in the prior Textiles and Apparel Monitor, the
projected global cotton output for 2013 has been bolstered
by a substantial Indian cotton crop. Indian production rose
85,000 tons for the year, offsetting declines in China and
Australia, among others. Conversely, Indian consumption
figures declined 30,000 tons for 2013-2014.
The Cotlook index represents the average of the five cheapest quotations for principal upland cottons traded on the
international market:
Monthly Average Cotlook "A" Index Pricing Trend
November 2012 through October 2013
$ per Pound
$0.96
$0.94
$0.92
$0.90
$0.88
$0.86
$0.84
$0.82
$0.80
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PRICING TRENDS
SYNTHETIC FIBERS
Synthetic fiber prices have declined since the prior Textiles
and Apparel Monitor. At the time of the prior monitor, DAK
Americas implemented a $0.03 per pound increase for
polyester staple fiber products as of September 1, 2013 after
a $0.03 per pound increase implemented on August 1, 2013.
The selling price increase was based on rising paraxylene
(“PX”) prices during July and August.
However, since then, PX prices declined steadily in September and October before stabilizing in November. PX pricing
has been soft based on weaker downstream demand.
Nylon pricing has followed a similar downward trajectory to
that of polyester, triggered by supply-demand dynamics,
particularly in Asia.
While prices for caprolactam, a major feedstock of nylon,
remained buoyant from August through mid-October, prices
have since declined.
Further dragging down polyester pricing, the cost of purified
terephthalic acid (“PTA”) has declined gradually since midAugust based on softer demand and lower feedstock prices.
Overall, pricing for polyester staple fibers has declined based
on weak market fundamentals in the Chinese market.
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PRICING TRENDS
APPAREL
As stated in prior monitors, few industries will benefit from
a “re-shoring” of industry more than the apparel sector.
Reports suggest that apparel imports have levelled off and
will continue to remain flat over the next year. With the cost
of manufacturing rising in Asia and the U.S. boasting higherthan-ever worker productivity, the domestic apparel industry
is poised for modest growth after years of downturn.
Recent data indicates that after-tax profits for the apparel
industry in the second quarter of 2013 demonstrated a 14%
year-over-year improvement. As a percentage of sales, aftertax profits climbed from 8.2% in the second quarter of 2012
to 9.3% this year.
While production levels and profits may be set to escalate in
2014, it remains to be seen if domestic consumption follows
suit. Despite a rise in per capita income and an upward
trend in population growth, the health of apparel demand
may be largely determined by larger macroeconomic factors.
In October, the National Retail Federation predicted that
holiday retail spending would increase nearly 4% this year, a
sentiment that was echoed by financial service firm Deloitte.
However, predictions have been scaled back since the
government shutdown, and expectations are now mixed. In
general, prevailing sentiment suggests a more modest
increase this season, with estimates now in the 2% to 3.5%
range.
The figure below illustrates the apparel producer price index, which denotes the selling prices received by domestic producers
for their output. As is demonstrated in the graph below, U.S. customers continue to pay a premium for American-made
apparel. In addition, decreasing material costs have not yet impacted the price of apparel received by domestic manufacturers.
Apparel
Producer Price Index
November 2012 through October 2013
111.0
110.5
110.0
109.5
109.0
108.5
108.0
Producer Price Index
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TEXTILES AND APPAREL REFERENCE SHEET
Pricing trend changes for October 2013 versus September 2013 and the third quarter of 2013 are as follows:
% Change
Commodity
Cotton
From September 2013
From Q3 2013 Average
(1%)
(3%)
(5%)
(5%)
2%
3%
Synthetic Fiber Feedstocks
Crude Oil
Natural Gas
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MONITOR INFORMATION
The Textiles and Apparel Monitor relates information covering most textile and apparel products, including industry trends, market pricing, and
their relation to the valuation process. GA provides our customer base with a concise document highlighting the textiles and apparel industry.
Due to the commodity nature of certain textile products, as well as the commodity nature of inputs used in synthetic fiber production, timely
reporting is necessary to understand an ever-changing marketplace. GA strives to contextualize important indicators in order to provide a
more in-depth perspective of the market as a whole. GA internally tracks recovery ranges for cotton fabrics and apparel, greige goods,
specialty textiles, synthetic fibers such as nylon and polyester, and a wide variety of apparel in all price points, but we are mindful to adhere to
your request for a simple reference document. GA welcomes the opportunity to make our expertise available to you in every possible way.
Should you need any further information or wish to discuss recovery ranges for a particular segment, please feel free to contact your GA
Business Development Officer using the contact information shown in this and all Textiles and Apparel Monitor issues.
GA’s Textiles and Apparel Monitor provides market value and industry trend information for a variety of textile and apparel
products. The information contained herein is based on a composite of GA’s industry expertise, contact with industry personnel,
liquidation and appraisal experience, and data compiled from a variety of well-respected sources believed to be reliable. We do not
guarantee the completeness of such information or make any representation as to its accuracy.
EXPERIENCE
GA has been involved in the liquidation of select industrial manufactures and wholesalers such as Atlas Textiles, Garment Services, Seatco, and Textile
Alliance, store locations for Jo-Ann Fabrics, Hancock Fabrics, and A.C. Moore, and numerous apparel retail stores such as Kids Mart, Clothestime,
Mervyns, and Eddie Bauer. Other industrial machinery and equipment liquidations include Alfani Shirts, Barth & Dreyfus, Belding Hausman, Linens
& Things, Rock and Republic Jeans, Teddi of California, and Textile Alliance. GA has worked with and appraised numerous companies within the
apparel and textiles industry, including industry leaders within each category. While our appraisal clients remain confidential, GA’s extensive list of
appraisal experience includes:
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One of the world’s largest integrated producers of synthetic fibers, with annual net sales exceeding $3.0 billion.
One of the largest manufacturers of performance synthetic fabrics, offering over 480 styles of synthetic fabric with varying weights, textures, and
technical functions.
A wholesale distributor of imprintable apparel, including t-shirts, fleece apparel, sports shirts, headwear, and athletic wear, with net sales
exceeding $700 million annually.
An industry leader in textile and chemical products, which include denim, dyed fabrics, and flame retardant fabrics for use in apparel and home
furnishings.
One of the U.S.’s foremost producers of retail fabrics, specialty fabrics, and craft products, manufacturing goods in a wide variety of synthetic
fibers.
A manufacturer of cotton-nylon greige fabrics used in the design of military and fire retardant apparel.
One of the world’s leading manufacturers of performance synthetic fabrics, offering over 480 styles of synthetic fabric in varying weights and
textures.
A designer and manufacturer of various home textiles, including linens, sheets, towels, aprons, uniforms, curtains, and pillows, among many
others.
Producers of various apparel types, including headwear, sweaters, and sporting apparel.
A manufacturer of tufted carpets from synthetic fibers serving residential and commercial applications.
GA also maintains appraisal experience involving more regionalized and specialized companies, allowing for the utmost depth in our valuations:
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Textile spinning mills producing fabric for the apparel, automotive, and home textile industries.
Distributors of fabrics for furniture, apparel, and other applications.
Manufacturers and distributors of apparel, rugs, and other woven fabric products.
Manufacturers and distributors of cotton, polyester, nylon, and acrylic fibers and specialty fabrics for various industries.
Spinners of cotton yarn.
Manufacturers of performance synthetic fabrics.
Retailers of textile products and apparel.
GA has also conducted a wide variety of appraisals of textile machinery. Some of the most recent appraisals included a large producer of polyester and
nylon yarns; several non-woven textile manufacturers from a variety of industrial sectors; carpet manufacturers; and manufacturers of apparel and other
fibers and fabrics.
In addition to our vast liquidation and appraisal experience, GA maintains contacts within the Textile and Apparel industry that we utilize for insight
and perspective on recovery values.
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APPRAISAL & VALUATION TEAM
BUSINESS DEVELOPMENT
Mike Marchlik
National Sales & Marketing Director
[email protected]
818-746-9306
David Seiden
Executive Vice President - Southeast Region
[email protected]
770-551-8114
Ryan Mulcunry
Executive Vice President - Northeast Region, Canada &
Europe
[email protected]
617-692-8310
Bill Soncini
Senior Vice President - Midwest Region
[email protected]
312-777-7945
Drew Jakubek
Vice President - Southwest Region
[email protected]
972-265-7981
Jennie Kim
Vice President - West Region
[email protected]
818-746-9370
Gordon Titley
Director of Valuations, GA Europe Valuations
[email protected]
+44 2073180574
OPERATIONS
Mark Weitz
President
[email protected]
818-884-3737
Ken Bloore
Chief Operating Officer
[email protected]
818-884-3737
Eric Campion
Associate Project Manager, Textile and Apparel Specialist
[email protected]
781-429-4068
ABOUT GREAT AMERICAN GROUP
Great American Group is a leading provider of asset
disposition solutions and valuation and appraisal services
to a wide range of retail, wholesale and industrial clients, as
well as lenders, capital providers, private equity investors
and professional services firms. In addition to the
Textiles and Apparel Monitor, GA also provides clients
with industry expertise in the form of monitors for the
metals and metalworking equipment; chemicals and
plastics; food and food equipment; automotive; wine and
spirits; and paper and packaging industries, among others.
GA also offers the European Manufacturing Monitor
via its subsidiary, GA Europe Valuations Limited.
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