The warning flags are starting to go up around the industry as early looks at third quarter results for the vendor side of the fence appear to show some strain from a combination of pricing pressure and lower unit sales in the commodity businesses.
Russell Corporation was the first to sound the alarm, revising its earnings expectations for the third quarter and full year 2003, due primarily from issues in its Artwear channel. RML chairman and CEO Jack Ward indicated that “pricing in the distributor market of the Artwear channel decreased substantially” and that high inventories upstream in the pipeline are providing the downward pressure.
“We knew business was struggling, but the release says it's worse than we thought,” said one analyst with C.L. King & Associates in a published report. “There's a bit of overcapacity around, and overcapacity in a sluggish economy leads to pricing pressure.”
RML has lowered earnings expectations for Q3 to between 47 cents and 53 cents per diluted share, down from a prior forecast of 72 cents to 85 cents and far below the analyst consensus estimate of 77 cents.
For the year, RML now sees EPS of $1.25 to $1.35 on sales of $1.22 billion to $1.25 billion, down from earlier guidance of earnings per share of $1.60 to $1.75 on sales of $1.25 billion to $1.28 billion. Analysts were looking for $1.63 a share in 2003.
The company still expects to see its athletic and outdoor segments “substantially exceed” 2002 prior year results and said that the Spalding acquisition also continues to exceed expectations. But much of the growth continues to come from those acquisitions as the continuing businesses appear to be stagnating.
Total sales were up 5.8% in the second quarter, but $15 million of the gain came from the acquisitions of Spalding, Russell Athletic and Moving Comfort and another $3 million came from favorable currency exchange rates. Without the upside from acquisitions and a weaker dollar, sales for the company would have actually decreased 1.3% on a continuing business basis.
Second quarter domestic sales would have been down 3.0% without the new companies included in the number, with the Artwear segment offsetting small non-acquisition gains at Russell Athletic and Mass Retail.
RML shares fell 17.5% for the week to $15.72 Friday.
Gildan Activewear may be partly responsible for some of the inventory issue as they also announced that earnings for its current quarter and fiscal full year would be lower than previously forecasted. Gildan is now forecasting full year diluted EPS in the range of C$2.55 – C$2.60, up 13% – 15% from fiscal 2002, but down from its previous forecast towards the high end of the C$2.70 – C$2.80 range.
GIL shares were down 6.4% for the week to close at $28.64 on Friday.
Unlike Russell, Gildan continues to build share in the Artwear market, but is doing so at lower price per unit. The issue now is that Gildan is starting to see lower unit sales as well impacting both top and bottom lines.
In addition to the timing impact of lower unit volumes, EPS for the quarter will be negatively impacted by lower than forecast gross margins due to a lower-value product mix and more promotional activity.
The S.T.A.R.S. report from ACNielsen Market Decisions showed market growth in T-shirts was 21.7% in July and preliminary data for August shows growth of 4.5%, but Gildan said that distributors were not re-stocking inventories at a similar rate.
The issues in the market may be forcing others to merge resources to weather the storm.
Broder Brothers, Inc., through its majority owner Bain Capital, has entered into a purchase agreement with Alpha Shirt Company and majority shareholder, Linsalata Capital. Financial terms of the deal, which is expected to close Sept. 30th, were not disclosed.
Both Broder and ASC are manufacturers of “imprintable” sportswear. As part of its overall integration strategy, Broder intends to maintain the Alpha Shirt brand, supporting it with its own catalog, unique product offering, customer service, sales force, and website. The deal is expected to have minimal impact on either Alpha's or Broder's customers. Broder currently has 14 U.S.
distribution centers, an exclusive relationship with Nike Golf and its own private label brand, Luna Pier.
“We are excited about the opportunity to bring two industry leaders together,” said Ed Conard, a Managing Director of Bain Capital.
Joy Manufacturing filed for Chapter 11 bankruptcy protection Tuesday after the collapse of its factor, E.S. Bankest, left it unable to pay its bills, according to published comments by the company's attorney.
“Bankest was the major lender and major infuser of money into this company for years,” said Larry S. Schantz in a report. “Obviously, with our primary lender being in receivership, it put us in a terrible situation. Joy Manufacturing has roughly $35 million in annual sales and “a few hundred” employees, he said.
Schantz said that he wasn't sure what Joy owes E.S. Bankest, but said the company owes other creditors roughly $6 million and saying the goal is to find replacement lenders. He acknowledged Joy's workers have already taken a hit.
“We're behind in some payroll,” he said.
