By Eric Smith

A significant headwind in the form of higher raw material costs took a toll on Unifi Inc.’s profitability and gross margins in the first quarter ended September 30 while looming tariff increases are also problematic, company CEO Kevin Hall said on Tuesday’s earnings conference call with analysts.

“While sales growth is ahead of our expectations, we experienced another sudden jump in raw material cost globally, which has impacted our profitability in the short term, most notably regional polyester, which was down more than 20 percent in gross profit,” Hall said. “To put this cost increase in context, we have seen sustained rise in our raw material cost globally for the past four quarters, and we have been chasing these price increases for some time now. When cost stabilizes, we are optimistic that our revenue growth will translate to earnings growth as well.”

Read more: Unifi’s Q1 Profits Drop

Until then, Unifi, a producer of recycled and synthetic yarns, will need to steer around these raw material cost increases, which are expected to roil the company into Q2, Hall said.

“Since we saw a spike in polyester raw material costs in September, which we believe was driven by higher global demand and tighter supply for polyester feedstocks, we expect gross margin to be negatively impacted in the second quarter,” Hall said. “We expect the increase in polyester raw material costs from Q1 to Q2 to be similar to the increase experienced last year at this time.”

Net sales in the first quarter of fiscal 2019 increased $17.4 million, or 10.6 percent, to $181.6 million, which beat Wall Street estimates by $9.3 million. This is compared to $164.2 million for the first quarter of fiscal 2018, an increase of $24 million, or 14.6 percent, when excluding the impact of foreign currency translation.

Net income was $1.8 million for the first quarter of fiscal 2019 compared to $9 million for the first quarter of fiscal 2018. Net income for the first quarter of fiscal 2019 was adversely impacted by comparatively higher operating expenses, $2.9 million less in pre-tax earnings from PAL and a higher effective tax rate. Diluted EPS was 10 cents for the first quarter of fiscal 2019—missing Wall Street estimates by 18 cents—and 48 cents for the first quarter of fiscal 2018.

The trade environment is another headwind for Unifi. Because of the new Section 301 tariffs implemented by the Trump Administration last month, “the industry has seen a 10 percent tariff that applies to all fibers, yarns and fabrics and some finished goods being imported from China,” Hall said. And that tariff is schedule to increase to 25 percent on January 1, further complicating Unifi’s supply but also sparking the company to reconsider its sourcing.

“From a macro level perspective, these tariffs have served as a catalyst for sourcing conversations to take place throughout the supply chain of our customers,” Hall said. “Our customers are looking to leverage their global supply chain to meet rapidly changing situations. Unifi remains uniquely positioned with its global supply chain and commitment to quality to service the industry and our partners wherever they operate.”

Looking ahead at Fiscal 2019, Unifi now anticipates mid-single-digit percentage growth for net sales and mid-single-digit percentage growth for operating income and adjusted EBITDA, assuming an improving price to raw material cost relationship.

The company also expects capital expenditures of approximately $25 million and an effective tax rate in the mid-40 percent range, subject to further adjustment in light of pending interpretations of the December 2017 federal tax reform legislation.

Previously, Unifi had expected mid-single-digit percentage growth for net sales and mid- to high-single-digit percentage growth for operating income and adjusted EBITDA. It also had expected capital expenditures of approximately $25 million and an effective tax rate in the low 30 percent range, subject to adjustment in light of pending interpretations of the December 2017 federal tax reform legislation.

Photo courtesy Unifi

[author] [author_image timthumb=’on’]https://s.gravatar.com/avatar/dec6c8d990a5a173d9ae43e334e44145?s=80[/author_image] [author_info]Eric Smith is Senior Business Editor at SGB Media. Reach him at eric@sgbonline.com or 303-578-7008. Follow on Twitter or connect on LinkedIn.[/author_info] [/author]