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Economic warning signs flashing for broad base of manufacturers

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A flashing red-light economic warning is emerging from the latest round of quarterly earnings reports among several manufacturers based in the Triad or with a major presence in the region.

The manufacturers — representing a broad base of consumer products such as apparel, firearms, nutritional foods, pools — are cautioning that cooling demand and continuing COVID-19 pandemic-spawned supply chain challenges are driving down their quarterly profits.

As a result, inventory levels are increasing among key retail customers.

The manufacturers’ responses have been to implement cost-cutting measures, such as reducing production hours and cutting back on marketing and capital investment spending.

Perhaps the most unnerving is talk about trimming their workforce even as many employers struggle to get responses to their “Help Wanted” signs.

“Many manufactured items can be postponed, especially if businesses are uncertain about the economic future,” said Michael Walden, an economics professor at N.C. State University.

“Downturns in manufacturing are usually a leading indicator of recessions. Hence, as manufacturing activity slows and possibly contracts, the odds of a recession increase.”

Walden said he is projecting a recession during either the first and second quarters of 2023 or the second and third quarters of 2023.

Bowman Gray IV, a local independent stockbroker, said a potential recession “could be a self-fulling possibility, but not assured.”

“Higher interest rates are already impacting consumer spending and mortgage originations and refinancing. Companies are curbing spending, borrowing and hiring with the expectations of additional slowing by consumers.”

Gray said it’s possible the Federal Reserve “may have gone too far too fast too late” with interest rate hikes designed to tackle inflation.

“If the economic brakes are slammed, they may have to pivot sooner than expected and be forced to cut again,” Gray said.

“Had they begun to raise rates 10 years ago in smaller increments over an extended period, it would not have been such a shock to the system.

“But having been under political pressure to keep the cost of money cheap, we are now paying the price for the Fed’s previous lack of independence.”

Unifi challenges

One primary example of the warning trend is Unifi Inc., which began its fiscal year 2023 by reporting Nov. 4 a $7.8 million first-quarter loss.

It was a ripple effect from its apparel business experiencing lower consumer demand for their products. It reported an 8.4% decline in sales to $179.5 million.

In response, Unifi withdrew its most recent fiscal 2023 outlook on net sales.

Unifi’s share price, already down 63% from a 52-week high of $25.38 in November 2021, dropped 24% during trading on Nov. 5 to $7.13. It has had a slight share-price recovery since.

Al Carey, Unifi’s chairman, led off the manufacturer’s first-quarter analysts call by saying “Quarter 1 has been a tough quarter, and it’s been due to one big contributing factor, and that is the slowdown of retail orders for apparel.”

“That’s affected our volume pretty significantly.”

Unifi, based in Greensboro, has about 1,330 production employees in Yadkinville and more than 250 in Rockingham County. It has about 2,270 of its 3,100 employees in the Americas as of July 3, including 110 at its Greensboro headquarters. About 300 of the workforce are contract workers.

Unifi chief executive Edward Ingle told analysts that, “as you can imagine, it’s quite a stressful time for our employees.”

Ingle said that “some of our proactive measures include reducing overall labor hours, labor incentives and retention programs.”

Unifi said in a separate statement that the manufacturer “is actively managing production activity and hours to align with the significant, sudden change in demand that has occurred over the last few months.”

“This includes extended manufacturing shutdowns over the Thanksgiving and Christmas holiday periods.”

Carey said retail customers of its yarns report inventories on apparel being anywhere from 30% to 80% above a year ago.

“Many of them are going to be discounting heavily during Black Friday and the holiday season, and hopefully, clear out some of this inventory,” Carey said. “But, it’s uncertain exactly when normal ordering patterns will return.”

Carey stressed to analysts that “we’re not just sitting here waiting.”

“We’re working on four very important initiatives that will strengthen our long-term business and will shore up our profitability even in the short term.”

Ingle stressed that the cost-reduction actions “are predominantly temporary because we do see this business bounce back.”

Hanesbrands

Carey said that Unifi “has been affected just like all those who are involved in the apparel industry.”

Hanesbrands Inc. reported Nov. 9 that slumping consumer demand for apparel lingered into the third quarter, resulting in a 47.2% decline in net income to $80.1 million.

In response, Hanesbrands lowered its financial guidance for fiscal 2022 for the second consecutive quarter.

The company’s initial full-year net sales projection was between $7 billion and $7.15 billion. It was lowered in August to between $6.45 billion and $6.55 billion.

On Wednesday, Hanesbrands set a range of between $6.16 billion and $6.21 billion. The latest forecast represents about a 9% decline compared with $6.8 billion in fiscal 2021.

The adjusted earnings estimated dropped from an initial range of $1.64 to $1.81 a share to between $1.11 and $1.23 in August.

On Wednesday, it was lowered to a range of 95 cents to $1.02. By comparison, adjusted earnings for fiscal 2021 were $1.83.

Hanesbrands’ fourth-quarter financial guidance includes sales in a range of $1.4 billion to $1.45 billion — which would represent a 19% year-over-year decline — and adjusted earnings in a range of 4 cents to 11 cents.

Chief executive Stephen Bratspies said the overall third-quarter performance was “in line with expectations, despite the tougher-than-expected sales environment.”

“Our business fundamentals, brands and categories remain strong, and we are focused on controlling those things that are in our control. We’re making progress in reducing SKUs (stock keeping units) and inventory, while optimizing our global supply chain.”

CFRA Research analyst Zachary Warring said that in response to the third-quarter report that “we continue to believe Hanesbrands will struggle as we move into 2023 with a weaker consumer and slowing demand for durable goods.”

“We would remain on the sideline until Hanesbrands can improve the balance sheet and return to single-digit growth.”

Other apparel worries

Gildan Activewear Inc. reported Nov. 3 that it had record third-quarter sales of $850 million, up 6% year over year.

However, sales were down from an overall record $895.6 million in the second quarter.

Gildan, based in Montreal, has yarn-spinning manufacturing and other operations in Mocksville, Eden and Salisbury. The latest Mocksville workforce count is at more than 200.

Breaking down the quarter, Gildan reported activewear sales climbed 13.1% to $742 million, while hosiery and underwear fell 25.9% at $108 million.

Gildan said that activewear sales were positively affected by higher net selling prices, though partly offset by lower sales volumes “stemming from demand weakness in retail and international markets.”

In the hosiery and underwear category, the sales decline “was driven by weak demand in retail and the impact of retailers managing their inventory levels.”

Culp Inc. reported Sept. 1 that a 24.4% decline in sales led to a $5.7 million loss in its first quarter of fiscal 2023.

The High Point fabrics manufacturer said the first quarter was affected by “a convergence of headwinds, including significant inflationary pressures impacting consumer spending, high inventory levels at manufacturers and retailers, a challenging labor market, and other macroeconomic uncertainties.”

Culp said those conditions “are likely to continue pressuring results through at least the third quarter.”

As a result, the manufacturer is providing just second-quarter financial guidance of net sales being slightly down as compared with the first quarter.

Hayward cutbacks

Meanwhile, pool equipment supplier Hayward Holdings Inc. reported Nov. 1 that it exceeded significantly lowered financial projections for the third quarter, posting a 54% decrease in net income to $23.1 million.

The manufacturer reinstated its fiscal 2022 sales guidance by projecting a 6% decline in full-year sales after shelving the guidance in July.

Hayward also took steps during the third quarter to “reduce labor in our production cost base” as part of an overall “cost optimization program.”

Hayward is a global designer, manufacturer and marketer of pool equipment and associated automation systems. It recently moved its headquarters to Charlotte, and has significant operations in Clemmons and Mocksville with more than 1,100 employees combined.

Hayward did not comment on whether the Clemmons and/Mocksville facilities had job cuts during the third quarter, or whether hiring plans had been reduced or curtailed.

Eifion Jones, Hayward’s chief financial officer, told analysts during Tuesday’s earnings conference call that “we have announced as of today further actions, both across our manufacturing cost base and across our selling, general and administrative rate.”

“We’re focused really on rightsizing our factories to the current production levels that we see. ... Production won’t be down sequentially in the fourth quarter.

“We are reducing production to allow us to get through that to finished good inventory more quickly, and we expect that to continue actually into 2023.”

The manufacturer said the “cost optimization program” was aimed at “addressing the current market dynamics and maintain the company’s strong financial metrics.”

“The initial focus was on a reduction of variable costs with specific attention to eliminating cost inefficiencies in our supply chain and reducing labor in our production cost base.”

Ruger, Herbalife

Sturm, Ruger & Co.’s profitability dropped for the third consecutive quarter, affected by the combination of inflationary squeezes on consumer spending and dealing with the flip side of record firearms purchases in 2020 and 2021.

Ruger reported another steep year-over-year decline in net income, down 47.8% to $18.4 million. That followed a 53.2% plunge in the second quarter to $20.7 million and a 20.8% decline in the first quarter to $30.2 million.

For fiscal 2022 to date, sales are down 20.6% to $446.6 million.

Ruger chief executive Christopher Killoy said in a statement that consumer demand has been “dampened in part by inflationary pressures, which often constrain discretionary spending.”

Meanwhile, Herbalife Nutrition Ltd. withdrew its fiscal 2022 guidance on Oct. 31. During Herbalife’s second-quarter earnings report, Herbalife revised its fiscal 2022 sales projections from unchanged, to up 6% to a range of down 4% to 10%.

Herbalife reported Oct. 31 that net sales fell 9.5% to $1.3 billion.

“Given the rapidly shifting macroeconomic sentiment and backdrop, as well as increased volatility in the marketplace, the company is withdrawing FY 2022 guidance,” Herbalife said in its quarterly earnings report.

“The company will periodically reassess its ability to provide guidance when we believe future performance can be reasonably estimated.”

Exceptions

There have been at least two exceptions to the manufacturing trends in Insteel Industries Inc. and Raytheon Technologies Corp.

Insteel finished fiscal 2022 with an 87.7% jump in net income to a record $125 million. Insteel reported fiscal 2022 sales climbed 40% to a record $826.8 million.

Insteel makes steel-wire reinforcing products largely for infrastructure projects. Steel material represents 70% of the company’s total product costs.

H.O. Woltz III, Insteel’s president and chief executive, said in a statement that the fiscal 2022 performance was “particularly gratifying in view of the difficult operating conditions experienced at times over the last 12 months, including raw material shortfalls, labor availability challenges and residential construction market weakness.”

Woltz later said during a conference call with analysts that “while the rising price environment produced a tailwind for earnings as average selling prices rose, it also created considerable operational and customer service challenges for our people, including shortages of nearly every input into our process, which created uncertainty surrounding production schedules.”

Woltz told analysts that “our labor costs have risen substantially.”

“I’d tell you that I really don’t expect to see that that will back off. So, we’ll have to deal with that through productivity, through investment over time, and we will.”

Meanwhile, Raytheon Technologies Corp. reported Oct. 25 a 1% decline in third-quarter net income to $1.39 billion. In response, Raytheon adjusted its sales and earnings guidance for fiscal 2022.

Raytheon chairman and chief executive Greg Hayes said in a statement that “we expect the global supply chain environment, labor availability and inflation will remain challenging near term, we remain focused on operational excellence, including cost containment and program performance, to deliver on our commitments.”

The company typically does not disclose a local workforce update.

When the brunt of the pandemic began to be experienced in mid-March 2020, Raytheon division Collins Aerospace had about 1,500 local employees. At that time, it was likely there had been significant local job cuts considering there had been at least 16,500 Collins jobs eliminated companywide.

However, Collins has about 1,700 employees in the Winston-Salem as of Oct. 25, according to Joel Girdner, a senior manager for external communications.

On Tuesday, Hayes told analysts during a conference call that labor availability “remains a challenge. Everybody sees it, especially in the supply chain.”

Hayes said Raytheon has hired more than 27,000 employees during 2022, increasing its overall workforce to more than 180,000. The company did not provide a workforce count per division.

“The challenge, thought, is we would need about 10,000 more people,” Hayes said.

“So, a lot of work yet to do on labor. It’s out there. ... We’ll continue to hire at this rate (of 3,000 per month).”

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@rcraverWSJ

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