Costing . . .

Why this tsunami of cost increases?

2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. O’Rourke

O'Rourke Group Partners LLC

Recent Price Increases . . .

 Unprecedented  Limited relief in sight  Global scale  Regional implications O'Rourke Group Partners LLC 2

Key Drivers . . .

  Increase in global fiber demand  Recession interrupted / masked the trend  For example, China:  Per capita fiber consumption rises from 15 to 33 pounds over the last decade Less arable land available for cotton   More needed to feed developing populations  Food equals 40 – 60% of household income Widespread weather issues O'Rourke Group Partners LLC 3

Fabric Prices . . .

 Significant rise in raw material price inputs  Cotton fiber nearly triples over six months  Polyester staple fiber up 40%  Price per yard gap East/West narrows  Fabric cost component of garment increases  Disproportionately to other component costs O'Rourke Group Partners LLC 4

Other Factors . . .

      Fabric availability tighter, increasing lead times Asian labor cost increases in key countries Less available labor in China (for apparel) Fuel increases drive up transport costs Increasing energy demand and costs in Asia New financing terms  Deposits and/or fabric pre-paid  More Letters of Credit  East/West garment price LDP narrowed and/or eliminated in various apparel categories O'Rourke Group Partners LLC 5

Average Apparel Manufacturing Hourly Labor Costs – US $

Haiti Nicaragua El Salvador Guatemala Honduras Mexico Bangladesh Vietnam India China Inland China Coast 0,41 0,51 0,58 0,86 1,05

Fully loaded, including social charges – Q4 2010/Q1 2011

1,45 1,54 1,68 2,06 .89 - .97

1.18 – 1.45

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Labor Productivity Matters . . .

75

Inland factories at 55% -65%; Improvement emphasis.

China

Average Apparel Manufacturing Labor Productivity % of International Standard - 2010 85 75 70

Some as high as 75%

65 55 50 50

Some at 60-65% 40-45% not uncommon; improvements are slow.

35-45% more typical but targeting 50% + with USAID program.

Vietnam Bangladesh Mexico Honduras Guatemala Nicaragua Haiti Source: O'Rourke Group Partners Factory Audits O'Rourke Group Partners LLC 7

Comparative Lead Time – Days Order to US Distribution Center

Some reporting 42 – 50 days.

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Basic Denim Pricing Differentials

Asia v. Regional (February 2011)

10% Denim gap to Asia 15 – 20% Basic Cotton Twills 18 - 20% Cotton Knit Jersey 23 – 25% Woven Textured Poly

O'Rourke Group Partners LLC 9

Men’s Basic 100% Cotton Denim Jean Cost June 2010 v. February 2011

13.75 oz. OE/OE, medium 10,00 9,00 8,00 7,00 6,00 5,00 4,00

7.07

1,00 0,22 0,53 0,37 0,90 1,11

7.31

0,19 0,65 0,42 0,96 1,24

8.96

1,27 0,22 0,68 0,40 1,01 1,11

8.40

0,19 0,75 0,44 1,01 1,24 3,00 2,00 1,00 2,94 3,85 4,27 4,77 0,00

2010 2010 2011 2011

Garment: China NICARAGUA China NICARAGUA Fabric: China Mexico China M exico O'Rourke Group Partners LLC Duty Shipping Profit External Wash; Embroidery; Print CMTF Trim/Packaging Fabric 10

Product Sourcing Implications Poly/Cotton Twill Pant / $

12,00 10,00 8,00 6,00 4,00 2,00

10.40 10.57 10.47 10.37

2,31

0,38 0,70 0,20

1,17 1,28 2,35

0,41 0,71 0,24

1,08 1,28 2,33

0,41 0,70 0,27

0,70 1,32 2,31

0,41 0,70 0,27

0,63 1,32

0,85 0,25

1,38 1,40 9.57 9.91

0,88 0,26

1,38 1,40 4,35 4,50 4,74 4,74 5,48 5,78

0,00 China South China Inland

Fabric Source Fabric $/Linear Yard Fabric Yield/Yards Req'd Labor Productivity China 2.90

1.5

0.75

China 2.90

1.55

0.60

Vietnam

China 2.96

1.6

0.50

Vietnam

China 2.96

1.6

0.65

Nicaragua

Mexico 3.65

1.5

0.65

Nicaragua

U.S.

3.85

1.5

0.65

O'Rourke Group Partners LLC Fabric Cost $/Garment Trim/Pkg Cost $/Garment CMT Seconds Mfg. Profit 10% Freight, Insurance Duty .286

11

Selected Uniform Markets Estimated % Regional Sourcing

85% 70% 65% 60% 50% 45% CBI/CAFTA MEXICO USA

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Regional opportunities abound. .

    Everyone is re-evaluating costs and suppliers.

All cotton-dominant categories Highest fabric yield-required categories  Jeans  Trousers Greatest quality and highest in-stock program requirements  Uniforms O'Rourke Group Partners LLC 13

Regional Competitiveness in Apparel Manufacturing

  

Degree of regional cost competitiveness takes many by surprise.

Synthetics getting another look regionally Increased demand for speed to market.

 Leaner inventories required at retail.

 More replenishment program shifts.

   More frequent, faster fashion deliveries.

Cycle compression in pre-production facilitating and providing more cost reduction.

Must improve sampling turnaround for basic fashion items.

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Other Important Trends

    Big box retailers and major brand owners involved in fabric cost negotiation.

Asian garment shifts to West but trim and findings often remain Asian-sourced.

 Buyers want to delay associated “new source” product testing and approval process.

Regional capacity limitations emerge.

Who will lead expansion? O'Rourke Group Partners LLC 15

For further information:

O’Rourke Group Partners, LLC

Mary T. O’Rourke Managing Director [email protected]

(917) 567-3540 www.ORourkeGroupPartners.com