Despite price drop for cotton, shoppers unlikely to get break

A customer pays for clothes at a Gap store in Palo Alto, Calif. ASSOCIATED PRESS Enlarge

Americans who bought jeans, T-shirts, and socks lately have had to shell out more cash. They'd better get used to it.

Even as cotton prices recede from all-time highs set in the spring, retailers and clothing makers are set to keep most of the price rises they put into effect this year.

And most will offer discounts only when they face pressure from their rivals.

Store chains and their suppliers avoided raising prices as long as they could, fearful of a backlash from consumers dealing with high unemployment and gasoline prices.

But just as they did not pass on all their cost increases, retailers and clothiers won't hand over all their savings.

Many will try to hang on to any margin gains next year as a cushion against other rising costs, betting that shoppers are becoming accustomed to paying a bit more after a decade with little clothing inflation.

"The reality is that we American consumers have enjoyed low prices on apparel for some time," said Robert Shearer, chief financial officer of VF Corp., which makes the moderately priced Wrangler and Lee jeans brands.

VF's gross margin, which measures the profitability of goods sold, shrank 1.2 points to 45.3 percent in its most recent quarter, entirely because of its jeans business, which makes up only a quarter of company sales.

Gap Inc. said in May that product costs would go up 20 percent in the second half of 2011, and it could not increase prices enough to make up for that.

Cotton futures trading on ICE Futures U.S. surged to a record high in March after climbing nearly three times in value from the previous year, when the spot cotton contract was about 80 cents a pound.

The contract has since dropped by more than half but is still 40 percent above levels of two years ago.

How much prices rise depends on the item and its cotton content. But Marshal Cohen, NPD Group's chief retail industry analyst, estimated that the prices of basic socks, underwear, and jeans prices have gone up by 10 percent or so.

An extra $3 on a pair of jeans may not seem like much, but on a $30 pair of Wranglers, it can be a hardship for shoppers who also have to shell out 23 percent more on average for gasoline than they did a year ago.

VF said last week that U.S. jeans sales were up slightly in dollar terms, thanks to moderate price increases, but it sold fewer pairs.

Cotton is harvested about 150 miles northwest of Los Angeles. Prices for the commodity have dropped since the high in March but remain 40 percent above the 2009 level. PORTERVILLE (CALIF.) RECORDER Enlarge

David Bassuk, AlixPartners managing director, estimated that retailers at best were able to pass off half of their higher costs to shoppers.

Now companies such as American Eagle Outfitters Inc. and Nike Inc. that sell clothes with high cotton content are telling investors that they expect their gross margins to improve starting in the second half of 2012.

"The benefit from cotton costs going down is going to be reflected in margins. They are not going to lower the prices," said NPD's Mr. Cohen.

George Feldenkreis, chief executive officer of Perry Ellis International Inc., pointed out that cotton is not the only cost that has risen: Labor costs in China, where most clothing bought by American consumers is made, are up, and higher gas prices have raised the costs of getting products to stores.

Given the nine-month-to-a-year lead time in the supply chain, prices will continue to increase into the spring.

After that, they should stabilize at higher levels.

"There won't be a drop in retail prices, but price increases will stop" said Nate Herman, vice president of international trade of the American Apparel & Footwear Association, which represents about 700 U.S. clothing companies.

One thing that may help rein in prices for consumers, to some extent, is competition.

Basics such as blue jeans are available from a large number of vendors, making higher cotton costs scary for retailers and manufacturers.

Jones Group Inc. for one is trying to get out of jeanswear.

Companies including such as Levi Strauss & Co. and HanesBrands Inc. are experimenting with fiber made of flax and hemp.

But so far, such efforts are rare in the apparel industry.

VF looked into different fabrics but ultimately decided it had to stick to cotton only.

"Consumers, when they pick up a pair of Wrangler jeans or Lee jeans, have certain expectations," VF's Mr. Shearer said.

Experimenting with how jeans feel would "harm the brand," he said.

But another factor that could push prices back down: continued weakness in the U.S. job market and overall economy.

Unemployment is still high and retail sales in recent months have shown only slight growth, meaning some retailers might have to cut prices again, especially if holiday sales are slow.

"The economy and the lack of a recovery will be more likely reasons for prices coming down," NPD's Mr. Cohen said. "Retailers are going to get competitive on motivating the consumer."