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UPDATE 2-Apparel maker Gildan's forecast misses as cotton costs stay high

Sneha Banerjee
Thursday, 21 Nov 2013 | 1:00 PM ET

Nov 21 (Reuters) - Canadian clothing maker Gildan Activewear Inc forecast first-quarter profit below analysts' estimates, saying its cotton costs would remain high because it bought the raw material before prices declined.

Gildan shares fell as much as 5 percent on the Toronto Stock Exchange on Thursday, even though the company reported a 9 percent rise in fourth-quarter profit.

Cotton prices have fallen nearly 17 percent from a five-month peak of about 94 cents per pound in August.

Montreal-based Gildan, which supplies T-shirts and other basic clothing items to screen printers, said cotton costs in the first three quarters of 2014 would be higher from a year earlier.

The company told analysts on a post-earnings conference call on Thursday that it could not raise prices of its cotton clothing to pass on higher raw material costs.

Gildan, like other retailers, said demand would remain weak.

Retailers such as Macy's Inc, Wal-Mart Stores Inc and Best Buy Co Inc have responded to weak demand by offering big discounts even at the risk of a decline in margins.

Gildan forecast first-quarter earnings of 33 cents to 35 cents per share, below the average analyst estimate of 42 cents, according to Thomson Reuters I/B/E/S.

Its 2014 profit forecast of $3.00-$3.10 per share was also below the average analyst estimate of $3.15.

FOURTH-QUARTER RESULTS

The company, which also makes private-label and branded socks for mass-market retailers, has been shifting focus to its own brands such as Gildan underwear and Gold Toe socks to raise profit margins.

However, Gildan's fourth-quarter gross margins were nearly flat at 28.3 percent as the benefits of cheaper cotton and an improved supply chain were offset by lower net selling prices of its printwear products.

"The real benefits to branded margins over time are going to be the impact of cost savings from yarn spinning initiatives (and) the leveraging of infrastructure that is already built to support the company's retail initiatives ...," Desjardins Securities analyst Chase Bethel said.

"There will also be a price impact because the Gildan brands at department stores will be priced at a premium relative to the Gildan brands sold at Walmart and other discount retailers."

Gildan, whose competitors include Hanesbrands Inc and L Brands Inc, said its printwear sales rose 12.5 percent to $423.9 million in the quarter ended Sept. 30.

Net sales rose 11.5 percent to $626.2 million.

The company's net income increased to $96.8 million, or 79 cents per share, from $89 million, or 73 cents per share, a year earlier.

Adjusted profit was 83 cents per share, in line with analysts' estimates.

Gildan raised its quarterly dividend to 10.8 cents per share from 9 cents.

The company's shares were down 3.5 percent at C$49.50 on the Toronto Stock Exchange. The stock has risen about 41 percent this year to Wednesday's close.

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