Katherine Homuth, CEO of Sheertex at the company’s factory in Pointe Claire, Que., on Feb. 8, 2024.Evan Buhler/The Globe and Mail
Innovative Montreal textile manufacturing startup Sheertex Inc. is slashing the size of its work force, blaming uncertainty over the threat of U.S. tariffs for exacerbating its already tenuous financial situation.
Chief executive officer and founder Katherine Homuth told staff on Wednesday that the company, which makes rip-resistant tights from the same polymer used in bulletproof vests, would temporarily lay off about 40 per cent of its nearly 350 employees and full-time equivalent contractors for up to six months. The company, known as SRTX, is expected to save $1-million in wages per month. Workers will receive employment insurance, and if they are not recalled after six months, SRTX will be mandated to pay each eight weeks of salary.
“This decision was not made lightly,” Ms. Homuth said in a note posted on LinkedIn, adding it would allow SRTX to operate with the minimum team required to meet its 2025 production and delivery targets. “In addition to the temporary layoffs, the company hopes to speed up the completion of its current fundraising effort, which it has struggled to finish but needs to fund working capital.”
Ms. Homuth said the catalyst for the layoffs was last weekend’s announcement by President Donald Trump of new tariffs on Canadian imports, which he has since postponed by 30 days.
“With the new tariffs we are facing 41-per-cent tariffs across all U.S. shipments,” she wrote. SRTX already pays a 16-per-cent duty as its products are not considered to be made in Canada under existing rules in the USMCA trade agreement. Those rules apply because more than 9 per cent of its raw materials are sourced outside the United States and Canada. The proposed change would also eliminate an exemption for packages shipped to consumers valued at less than US$800, she said.
If the tariffs go into effect, SRTX would face a 41-per-cent duty on all products, up from 0 for direct-to-consumer orders and 16 per cent for orders from retailers. Ms. Homuth said while SRTX had been bracing for the 25-per-cent increase on bulk shipments to U.S. retailers, it hadn’t expected them to be tacked on to the existing 16-per-cent duty nor applied to consumer shipments.
“Brands that outsource production can pivot quickly, but companies like ours, who’ve built vertically integrated operations here at home, face far greater challenges,” Ms. Homuth wrote in the post, adding that 85 per cent of SRTX’s sales are in the U.S.
Ms. Homuth said in an interview that with SRTX in need of near-term financing, “we had to stretch the runway” as she estimated the tariffs could cost it $500,000 to $1-million a month in lost sales. She said SRTX is using the 30-day postponement period to switch sourcing for some yarns it uses in combination with its polymer away from foreign sources to U.S. suppliers and to ship as much finished product as possible over the border.
Economists with Royal Bank of Canada have warned that Canada’s economy is not poised to absorb a shock at the scale of Mr. Trump’s tariffs. The country, which already faces a declining GDP per capita and stagnant investment, could face its “largest trade shock in nearly 100 years,” economists Frances Donald and Nathan Janzen wrote in a report on Sunday.
Canada’s manufacturing sector, which makes up about 9 per cent of the country’s GDP and 70 per cent of total trade with the U.S., is particularly at risk, according to RBC. If U.S. demand drops across all sectors in proportion to a 25-per-cent tariff, Canada could stand to lose roughly 600,000 jobs as unemployment could soar to nearly 10 per cent, University of Calgary economist Trevor Tombe wrote in The Hub. The threat of tariffs caused a market selloff Monday before Mr. Trump issued his reprieve.
Ms. Homuth has been on an unlikely and constantly challenging mission to replace run-prone nylon tights with a rip-resistant alternative made from ultrahigh-molecular-weight polyethylene (UHMWPE). SRTX is also looking to use the product to make waterproof fabric to replace Gore-Tex and others that use “forever chemicals” that don’t break down in nature, to make future products from recycled tights, and to champion a reshoring of manufacturing to Canada.
During its eight-year life, SRTX has uprooted from its original home in Ontario’s Muskoka region; convinced skeptical industry observers that it could create a viable, sturdier alternative to nylons; survived the COVID-19 pandemic; and raised US$200-million in equity and convertible debt from investors, including Swedish retail giant H&M, Lululemon founder Chip Wilson and clean-technology venture funds. Its products are stocked by H&M, Costco, Walmart, Holt Renfrew, Macy’s and Kim Kardashian’s SKIMS banner.
SRTX also built a vertically integrated operation in Montreal that makes its own thread, part of an effort to drive down its production costs per pair to under US$10 now from about US$100 in 2018. With the operation now producing all of its UHMWPE thread, Ms. Homuth hopes to bring down the cost per pair to US$5 and achieve operating profitability this year. Sales are expected to triple in 2025 to six million units, but a shift from direct-to-consumer sales to wholesale channels meant revenue last year dipped by a third, to US$30-million.
After raising US$50-million last fall anchored by US$25-million from the Quebec government, Ms. Homuth revealed on social media in December that SRTX was struggling to raise a further US$23-million needed to fund working capital until it is paid in the second half of 2025 for four million pairs ordered by large retailers.
Ms. Homuth took an unconventional approach, candidly sharing her frustration and angst on social media about how difficult it was to finance her business. She even crowdsourced improvements to her investor pitch deck to help her break through with investors.
“Let’s be brutally honest: this journey has been harder than anyone expected,” she wrote in one recent LinkedIn post. “We’ve missed timelines. We’ve burned through cash. We’ve had to make brutal choices between growth and survival. But that’s exactly what makes what we’ve built so valuable.”
Ms. Homuth told The Globe and Mail her public disclosures won empathy from many individuals – but that behind closed doors the reaction from financiers “was much more negative” as she was criticized for talking openly about her challenges.
With SRTX so close to breaking even, “either we raise the money and are a $50-million-plus revenue, profitable manufacturing company at the end of the year, or the company does not make it to the end of this year in its current shape or form,” she said.
“I am confident that we will find a way because losing a business that could be a $100-million-plus profitable company by next year with proprietary technology doesn’t seem like something shareholders and the world should let happen. That is where my confidence comes from. But I also don’t have the money in the bank yet” and, with the threat of tariffs, “it feels like the goalpost is getting further and further away.”