Aeropostale, Inc. (ARO), Urban Outfitters, Inc. (URBN): The Ethical Questions of Uzbekistan’s Cotton Industry

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Perhaps fearing such a potential backlash, Urban Outfitters, Inc. (NASDAQ:URBN) has recently shown signs of improvement. In its company policy, Urban Outfitters now claims that it “does not knowingly carry products” or “source any private label or own-brand products” from Uzbekistan. However, Urban Outfitters, Inc. (NASDAQ:URBN) has not signed a widespread pledge to stop child and forced adult labor in the country, which has already been signed by 131 other companies, including Adidas, American Eagle Outfitters (NYSE:AEO), H&M and Zara.

Considering that cotton costs have risen nearly 50% over the past decade, I believe that choosing more ethical sources of cotton is a choice that only richer companies with stronger bottom lines are able to make.

not only signed the aforementioned pledge, but directly addressed the “ongoing problem in the harvesting of Uzbek cotton” by asking its vendors to “restrict the use of cotton in Disney-branded products until this matter is resolved.” Although that seems like a bold statement from the House of Mouse, investors should remember that cotton products do not comprise a significant portion of the company’s top line.

Nearly half of Disney’s revenue is generated by its media networks, and a third comes from its theme parks and resorts. Disney’s Consumer Products segment, which contains the most textile-based products, only accounted for 8% of its top line in 2012. Therefore, Disney has very little revenue to lose and a lot of positive PR to gain from its restrictions on cotton.

Is this just the way the world works?

In our globalized capitalist society, where publicly traded apparel retailers fight tooth and nail to preserve their margins while offering competitive fashions and prices, demanding retailers to change their supply chain overnight is impossible. Although bad PR is likely to result in some industry-wide pledges, the Uzbek cotton industry won’t go away soon.

The European Union has taken some actions, such as the refusal to extend a bilateral trade agreement with Uzbekistan, but the U.S. has actually increased bilateral ties with Uzbekistan over the past two years. These increased ties were part of an effort to expand the U.S. military land network into Uzbekistan’s neighbor, Afghanistan.

The Foolish bottom line

I expect the use of Uzbek cotton to be a divisive issue for many years to come, even as larger retailers pledge to “not knowingly” use cotton sourced from the region. This brings us full circle back to my opening statement – that ethical investing presents a dilemma for many people.

Should we chide Aeropostale, Inc. (NYSE:ARO) for purchasing the cheapest products possible when both its top and bottom lines are crumbling? Should we applaud Disney because it made a bold statement that is fairly inconsequential to its top line growth? Lastly, is there really any way to escape this conflict of numbers and ethics in the world of investing?

Leo Sun owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of The Walt Disney Company (NYSE:DIS).

The article The Ethical Questions of Uzbekistan’s Cotton Industry originally appeared on Fool.com.

Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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