Cone goes hungry on a high-fiber diet.

• Author: Elliott, Frank
• Position: Cone Mills Corp.

The 1990s have not been kind to Greensboro-based Cone Mills Corp., the world's largest maker of denim. When Cone (COE-NYSE) returned to the public market in 1992 after eight years in private hands, it enjoyed record earnings. Net income hit $1.59 a share, then rose to $1.68 in 1993.

Since then, it has been downhill. Net income dwindled each successive year, slipping into the red in 1995. In 1996, Cone lost 19 cents a share on $745.9 million in revenue. But executives are hoping the beleaguered company will turn the corner this year as it sheds non-core businesses.

Cone's troubles have a number of causes, among them soaring cotton prices. In the early '90s, cotton sold for less than 70 cents a pound. But crop failures in cotton-producing countries sent prices up in late 1994 and 1995, hitting a peak of $1.17 a pound. Cone uses more than 200 million pounds of cotton a year, and analysts estimate that every 1-cent increase reduces earnings per share 5 cents.

"It's been very difficult for producers to pass this cost [of cotton] along, and the result has been margin pressures," says Lorraine Miller, an analyst with Robinson-Humphrey in Atlanta. That's because a glut in square footage for apparel has led stores to consolidate floor space, creating a backlog of denim clothing in warehouses. The inventory build-up has continued to be a drag on production and sales in Cone's denim operations even though cotton prices have declined since June to the 70- to 74-cent range.

And as denim goes, so goes Cone. Apparel fabrics made up 85% of Cone's revenue in 1996. Most of that is denim, though the segment also includes the sportswear operation, maker of shirting and, until recently, synthetic fabrics. The remaining 15% came from Cone's home-furnishings segment, which is upholstery and decorative fabrics and a miscellany of other businesses.

Denim isn't the only source of trouble. Specialty sportswear also suffered from oversupply, and the upholstery-fabrics operation was fighting a switch in customer preference away from the printed fabrics that Cone produces. Some wounds were self-inflicted, such as Cone's ill-advised attempt to take its John Wolf brand of decorative fabrics upscale with designer names and prints. John Bakane, Cone's executive vice president and chief financial officer, says the Wolf venture was "executed poorly." The company replaced Wolf's president, national sales manager and design staff.

Cone's woes are evident in its fourth-quarter...