Bonds underwear owner Pacific Brands has warned it will have to increase prices in 2016 because of the falling Aussie dollar.
The retailer, which also owns Berlei and Sheridan, says a weaker Australian dollar is expected to hurt its margins, as about 75 per cent of its goods are purchased in US dollars.
Chief executive David Bortolussi says that could lead to price increases across the industry from the winter 2016 season, when most hedge books unwind.
"Given the size of the FX movement, the cost reduction programs we've already implemented, and the underlying inflationary pressures in the cost base, pricing will have to continue to play a significant role," he said.
The company's hedging policy - which locks in contracts at certain currency levels - have bought the company time to work on ways to mitigate the impact, Mr Bortolussi said.
"The gross impact of the movement in the Australian dollar will be significant," he said.
The Australian dollar is currently buying about 78 US cents, and is expected to continue to fall, especially if the Reserve Bank cuts the cash rate again in 2015.
"Looking ahead at 2016, the majority of the first half is covered in the mid-80s (US cents), after which time the current dollar rates become more relevant in the second half," Mr Bortolussi said.
Pacific Brands made a $109 million loss in the six months to December 31, due to $138.5 million in one-off writedowns and a slide in earnings from its underwear division.
The result was an improvement on a net loss of $219 million a year ago.
Earnings from its underwear division dropped 26 per cent to $26.7 million, as weak wholesales and margins offset stronger retail sales.
Pacific Brands said it expects a continuation of challenging and variable market conditions in the second half of 2014/15.
Full year results will largely be dependent on trading in May and June, two significant months for the group.
Morningstar equity analyst Farina Parsons described the outlook as dismal.
"The market was a bit too low in their forecasts and now realise things weren't as bad as they thought which is why the share price has risen," she said.
"But the business is still challenging, particularly in 2016 when they're going to have the currency headwind."
Pacific Brands shares closed up one cent or 2.2 per cent, at 47 cents.
BONDS OWNER NARROWS ITS LOSS
* Half year net loss of $109m, narrowed from $219m loss in 2013/14
* Revenue of $392m, up six pct from $370m
* No interim dividend, down from two cents
Share
