Gildan Activewear (NYSE:GIL), Quiksilver (NYSE:ZQK), Volcom (Nasdaq:VLCM) Most Exposed to Cotton Prices Says FBR

Commenting on the price of cotton, Chinese tightening, and the effect on companies, the most exposed in the view of FBR Capital are Gildan Activewear (NYSE:GIL), Quiksilver (NYSE:ZQK), Volcom (Nasdaq:VLCM). Also considered as having strong exposure to cotton are VF Corp (NYSE:VFC) and Hanesbrands Inc (NYSE:HBI).

FBR said, "The potential for tightening China monetary policy, European sovereign debt risk, and, more recently, the conflict in Korea have conspired to drive a strengthening U.S. dollar and popping of the commodity bubble, including cotton. As a result, apparel vendors who had chosen to wait to lock in cotton for 2H11, may (depending on buying/hedging strategies) be getting somewhat bailed out, but it is all relative in our opinion. Over the last few weeks, cotton prices are off -30% (March 2011 contract now at $1.17/lb, down from peak of $1.51/lb on November 9). While a technical reversal could continue over the near term (although in recent days it has flattened), we still believe the underlying supply/demand imbalance still holds (see the latest USDA report suggesting supply is tightening further) and will take time to be neutralized, supporting elevated cotton pricing over the intermediate term (supply from India will be worth monitoring). Pricing power will still be critical in looking to offset not only cotton, but other product cost inflation in labor and freight. If the air continues to get let out of the bubble, many apparel vendors may be able to lock in at more favorable rates (or, should we say, less worse rates), somewhat minimizing the risk to 2H11 estimates, and therefore mitigating the near-term cautious stance on the group and some of the select names we have highlighted. Although, it is worth noting that because supply is so tight, getting hands on cotton may be easier said than done. Also, while "apocalyptic" cotton risk may be off the table, most companies will still bear higher year-over-year cotton costs (cotton was $0.60s/lb on average in FY10) and other product cost inflation in labor/freight still exists, so consensus expectations for flat gross margin in FY11 still don't make much sense to us (unless you assume everyone can raise prices to offset). The potential exists for inverse correlation trading to continue—cotton pricing down, stocks up—including some of the names we've highlighted as the most exposed to cotton costs - Gildan Activewear, Quiksilver, and Volcom - as well as others that are perceived as having high exposure, including Hanesbrands Inc and VF Corp."

Gilden was trading at $30.79, rising by $0.71, or 2.36 percent as of 12:42 PM EST. Quiksilver was at $4.38, gaining $0.08, or 1.86 percent. Volcom traded at $18.37, increasing $0.37, or 2.06 percent. VF Corp stood at $84.65, up $1.77, or 2.14 percent. Hanesbrands Inc rose to $27.57, gaining $0.42. or 1.55 percent.