Outlook for Current Year to January 2011
We maintain our Brand sales guidance range of 0% to +3%, albeit that the fourth quarter presents tougher comparatives than the third and we may not maintain the current position at the upper end of the range. Product margins and operating costs remain well controlled and in line with our internal budgets. The outlook for Group profit before tax remains unchanged and in line with our September guidance and current market expectations. Accordingly we reiterate our profit range of £535m to £560m. Earnings per share would be in the range 214p to 224p, an increase of between 14% and 19% on last year.

Outlook for 2011 Prices
As a result of further rises in the price of cotton, retail price rises are likely to be at the top end of our previously stated 5% to 8% range for the first quarter of next year. The longevity of what appears to be a speculative bubble in cotton prices will be critical in determining prices for the second quarter.

Eoin Treacy's view Our cotton data goes back to 1960 and prices are now at historic highs in nominal terms. In inflation adjusted terms (dividing by the CPI) the current rally looks more like a breakout from a 10-year base formation. Cotton has accelerated impressively over the last month in particular and is now overextended by just about any measure.

In normal circumstances such an impressive price rise would result in a lot more cotton being planted next year. However, cotton is not the only agricultural commodity whose price is rising. There will be plenty of competition among various crops for available acreage next year so the normal supply response may not be as emphatic as one might expect. Considering the size, speed and endurance of the breakout relative to the 35-year base in nominal terms, there is a possibility that the 80¢-$1 region could offer a new floor for cotton prices.

If this turns out to be the case, then the rag trade will have to change its inventory management operations. Until now, it has not paid to warehouse raw materials because cotton prices never held a breakout. We know the current acceleration cannot go on indefinitely which means that a medium-term peak is quickly being approached. However, what is of more importance to consumers of the fibre is where it finds support on any pullback. If an approximation of current high prices is held, as has been the case with other agricultural commodities over the last decade, then this will have an economic impact in terms of clothing prices.

For more than 30-years the cost of the raw material and the end product has decreased. The fashion industry has ballooned, with both demand for relatively cheap clothing and a preponderance of different brands emerging to supply the perceived need. With cotton prices rising, and potentially on a secular upleg, the future for the already competitive fashion industry is likely one of margin compression and attempting to pass on higher costs to consumers.

Next rallied impressively from its 2008 low to challenge the 2007 peak by April of this year. It retested 2400p last week and has pulled back to test the 200-day MA. It will have to sustain a move to new high ground to reaffirm the medium-term uptrend.

H&M is the largest share on the Swedish OMX and its performance has been instrumental in the outperformance that Index. Prices more than doubled from the 2008 low to hit a recent peak near SEK260. While the progression of rising lows remains intact, it is now testing the 200-day MA and needs to hold above the SEK210 area if the medium-term uptrend is to remain consistent.

While Marks & Spencer is not wholly focused on apparel, the share is worthy of mention. It broke out of a yearlong range four weeks ago and provided it holds above the 200-day MA, currently near 365p, the medium-term upside can continue to be given the benefit of the doubt.

Ross Stores remains the clear leader among US apparel retailers. It broke upwards to another new high this week and an Midpoint Danger Line stop (MDL as taught at The Chart Seminar) in the region of $55 would be required to question medium-term upside potential. (Also see Comment of the Day on October 15th 2009) http://www.fullermoney.com/x/default.html?mc=y&id=1741&schtxt=ross

Target, Gap, Costco, Abercrombie & Fitch, Nordstrom and Urban Outfitters are all performing better than their European counterparts, probably benefitting from the weakness of the US Dollar and would need to take out their September lows to question medium-term upside potential.