Professor Mike Lord Explains How Raw Materials Prices Impact Unifi's Bottom Line

Unifi profit plummets in fiscal first quarter
Reposted from Winston-Salem Journal by Richard Craver

The combination of lower sales and higher raw-material costs led to a sharp drop in profit for Unifi Inc. in its first quarter of fiscal 2012.

Unifi reported Thursday net income of $286,000 in the first quarter, which ended Sept. 25. That’s compared with $10.2 million a year ago, a decrease of about 97 percent.

Investors responded to the lower earnings performance by sending Unifi’s share price down 9.7 percent, or 88 cents, to close at $8.15.

Unifi, based in Greensboro, has its largest U.S. yarn-manufacturing presence in Yadkinville with 970 employees there.

Sales were down 2 percent in the quarter to $171 million, while its expenses were up 4 percent to $159.2 million.

The company said demand for its domestically produced polyester and nylon products softened during the quarter.

“Apparel companies delayed purchases ahead of the holiday-selling season in order to manage inventory levels,” the company said.

Unifi said raw-material costs remained at near-30-year high levels for the second consecutive quarter while the company experienced tight supply across its polyester supply chain. The company’s finances also were affected by the strengthening of Brazil’s currency and its impact on production costs in that country.

Bill Jasper, chairman and chief executive of Unifi, said raw-material prices will decline over the next few quarters. He expressed confidence that Unifi’s earnings will grow in fiscal 2012.

Michael Lord, an associate professor of strategy and entrepreneurship at Wake Forest University, said, “Unifi has the kind of business where changes in costs or sales get magnified to their bottom line, both on the upside and the downside. If raw materials were to go down and capacity utilization go up, profits could swing right back up again.”

Peter Tourtellot, managing director of Anderson Bauman Tourtellot Vos & Co., a turnaround-management company, said Unifi’s revenue could be flat throughout fiscal 2012 because manufacturers are “taking a safe course in managing their inventory” in the sour economy.

“How well Unifi has cost controls in place and their ability to adjust their manufacturing to this environment will tell the story for 2012. I expect to see losses in the year ahead.”