California Apparel News

With the U.S. economy predicted to grow faster this year than in 2011, apparel companies are starting to feel that better times are ahead.

The ramp-up of raw-material prices is easing, and consumers are confident the economy is poised to grow, with the national unemployment rate hovering around 8.3 percent.

Apparel makers and clothing importers have spent the last four years playing it safe to survive. They’ve kept inventories low and gone lean.

The worst seems to be over. But there are a few challenges ahead that could turn the calm seas into rough waters.

The California Apparel News talked with several financial experts and factors about what bumps could be encountered along the way to prosperity. Here are their answers.

Sydnee Breuer
Senior Vice President, Business Development
Rosenthal & Rosenthal of California Inc.

While the apparel industry is seeing signs of economic recovery, bumps in the road could affect some, or many, manufacturers.

The most pressing bump at this juncture might be the credit standing of the customer base, most notably, Sears. The manufacturers and importers need to put goods into production and commit to production long before the financial community can determine its own course of action with the customers should there be a major customer-credit issue. Revenues only really count once the receivables are collected.

Another concern should be going back to the “old way” of doing business—the way it was done before the “Great Recession.” There still needs to be continued pressure on keeping inventory levels manageable and expenses under control. While top-line revenues may be increasing, that is only good if the bottom line follows along.

Ron Garber
Executive Vice President and Regional Manager
First Capital

There is definitely an uptick in demand at the retail level for product. However, what I see as the manufacturers’ major challenge over the next three to six months is the ability to maintain a steady and reliable flow of goods, especially from overseas.

With demand higher, there is more pressure on production capacity in Asia, and I understand that the factories, especially in China, are tightening up their credit terms and squeezing out the smaller customer.

Unless the domestic buyer has had a longstanding, satisfactory relationship with their makers, the need for a substantial upfront cash deposit to ensure timely deliveries has become necessary.

The alternative is to, perhaps, seek out new resources in unfamiliar territories, which can lead to its own set of challenges, such as poor quality, late deliveries, quota issues and the aforementioned need to gamble a large cash down payment in lieu of terms.

A few options to consider for mitigating the risk of employing new sources of supply would be to establish a documentary letter-of-credit facility with your bank or factor, which has some built-in protections for the importer, or negotiating LDP (landed, duty paid) terms with the factory, which would give the importer an opportunity to inspect the goods in the United States before payment.

Therefore, I believe a key ingredient in achieving their goals this year for manufacturers and importers is to protect and nurture their major vendor relationships or, when seeking alternatives, be sure they follow sound business practices by listening to the advice of their professionals to minimize the unforeseen risks of going outside their comfort zone.

Rob Greenspan
President and Chief Executive Officer
Greenspan Consult Inc.

I do believe the economic situation is improving in the apparel industry for many. That said, there never is a time to relax in this business.
For me, the important point to remember is that the problems of the past are not completely behind us. Be careful in your decision-making process. Don’t forget the tough times you went through to survive during these very difficult times.

What you did during those difficult periods should be lessons learned, not forgotten. You should not let your overhead grow without proper controls. Stay lean, mean and tight. Don’t get lazy and start hiring without good cause.

Most companies survived by reducing excess overhead during this difficult economic time. Keep that same mentality. The same can be said for buying and producing inventory. Most manufacturers and importers survived by keeping their inventory low, turning it fast and not taking any risk. The same should be happening now. Don’t speculate, don’t over cut and don’t over buy.

Lastly, don’t take any risks on customers who do not have credit. Retail is still risky, so protect yourself.  Ship to credit- or insured-approved retailers. Do not step out on taking a credit risk. It could be a disaster for you.

Sunnie S. Kim
President and Chief Executive Officer
Hana Financial Inc.

A major stumbling block that manufacturers face is potentially a self-imposed one—believing the illusion of a robust economy that has fully recovered from the recession. In my opinion, this is not yet the case, a view unemployment figures and other data support. This is especially relevant given that the ultimate customer of apparel manufacturers are individual consumers.  

Therefore, I believe that manufacturers and others should continue to focus on the practices that kept them going through the recession and avoid the following bumps in the road: carrying too much inventory, increasing overhead unnecessarily, broadening their customer base without sufficient focus on margins and being unprepared for raw-material increases in the future.       

It now appears that many of the weaker players have exited, leaving the industry more sustainable with fewer but stronger participants.  

Dan North
Chief Economist, North America
Euler Hermes North America

The biggest risk right now is high oil prices, which are putting a damper on consumption. At the moment, it’s the fear of supply disruption caused by Iran’s saber rattling that is driving prices higher.

Iran is threatening to close the Strait of Hormuz (unlikely they could really do that), where 20 percent of the world’s oil supply passes. Many economists believe that gasoline prices of $5 a gallon would severely curtail economic activity, but I don’t expect it to get that high.

After oil prices, the biggest risk is that serious fiscal issues could arise in the fall.  First, the payroll and [President George W.] Bush tax cuts are set to expire just as a reduction in jobless benefits and mandatory sequestration budget cuts (when spending is held back to reduce the deficit) arise. Tax increases and spending cuts are good for reducing the deficit but could also slow economic growth. Secondly, the debt ceiling may need to be lifted again, which could cause more political brinksmanship.

The other risks would be a re-emergence of the European debt crisis (likely), which could hurt confidence, and then a stagnation in the employment rate, whose recent drop has been very helpful to the economy.

Don Nunnari
Executive Vice President
Merchant Factors Corp.

If you import, China has become more expensive. Yes, raw-material prices have dropped significantly, but fuel prices have increased. We understand that the weaker factories in China are disappearing, leaving the better ones more leverage to raise prices.

For manufacturers producing locally, they need sufficient trade credit or cash available to buy their raw materials and produce on time.

Manufacturers have to know their customers and potential customers. Most companies that have survived the recession are operating much more efficiently. They’ve reduced their expenses.

The challenge for many who sell major retailers is understanding the cost of doing business with these accounts. What will be the chargebacks? What will be the markdown costs? Are you making money shipping this customer? Even if you sell boutiques, is your gross margin sufficient to operate profitably? What is the credit risk and impact on the manufacturers’ cash flow if the customer is a slow payer? What if they don’t pay at all? Does the manufacturer have the proper financing and non-recourse factor on board to protect them against the default of a retailer?

Yes, overall, things have improved. We have seen it in our clients’ sales growth and in the number of prospective new clients. But there are still “bumps” out there, and companies need sufficient capital and savvy management to prosper.

Dave Reza
Senior Vice President
Milberg Factors Inc.

Here are some of the bumps in the road that I see:

• Rising energy costs, particularly rising gas prices, which will impact consumers’ disposable income.

• Reallocation of production capacity in China. In the past few years, human resources and capital expenditures have shifted from light to heavy manufacturing. Less capacity will increase production costs.

• Increasing domestic consumption in China. There could be price inflation as competition for product grows.

• Instability of commodity prices. Harvest, weather and governmental regulations could impact commodity prices.

• Sovereign-debt issues facing Europe can still disrupt financial markets and impact American consumers.

• Retail restructuring. One of the major retailers, JCPenney, is renovating its image and marketing strategy. This may, or will, have an impact on local manufacturers and importers.

Tri Sciarra
Executive Vice President
Capital Business Credit

While the economy has improved, there are still challenges that continue to face apparel companies, particularly when it comes to managing inventory and overhead.

Manufacturers and importers still must carefully manage production to minimize delays of inventory arriving to the United States that would threaten delivery windows. Shipping late could lead to unwanted allowances.

With the strict lending environment abroad, it often takes factories a longer period to ramp up. At Capital Business Credit, we continue to see overseas deliveries arrive late, even as the retail environment shows improvement in the United States. There is also the case of some retailers asking for deferrals. Inventory sitting with the importer, waiting for the retailer to accept shipment, adds to overhead expense and threatens margins.

In summary, managing overhead and inventory are two disciplines that require attention at every level in many industries.

Kevin Sullivan
Executive Vice President
Wells Fargo Capital Finance

Most of our clients are, in fact, seeing some positive movement in back-order positions as the economy improves. What many are having to grapple with is the appropriate mix of customers.

For a smaller, up-and-coming brand, the issue might revolve around the appropriate time to introduce the brand into larger, more mainstream retailers, without alienating the core group of specialty retailers, who may have been instrumental in helping to build the brand.

Given the larger capital base required to deal with the majors, others are trying to determine which majors make the most sense based upon a number of factors, some of which are the level of dilution inherent in selling a given retailer as well as the financial condition of the retailer.

While most retailers have begun to post more positive results, those still experiencing issues force manufacturers to determine how much production risk they want to take in building product for an order that might not ultimately ship if the deterioration in the financial condition of a customer accelerates.

Ken Wengrod
President
FTC Commercial Corp.

I think there are four or five bumps in the road that could have a significant impact on our industry.

We have an up-and-coming election, and there is a huge budget imbalance that could have an impact.

Then there is Europe. Europe is an ongoing financial crisis that can have a negative impact on the U.S. economy if there is no quick resolution.

And [Brent] Crude oil* is at $124 a barrel. In 2009 it was down to $30 a barrel. That affects the cost of bringing in imports from China.
China prices are going through the roof. Their wages are going up. That has an impact on the apparel industry.

We know that family debt has gone down, which is one of the positive things going on. When the economy starts feeling a little better, I think there will be less impulse buying. People were spending on throwaway clothes, and now people are looking for more value.

With all that being said, I see tremendous opportunity for U.S. domestic production. If you look at the Zara business model, it was made in Europe and they were able to have quick turn and get in and out of the market and supply what the markets were looking for. I see that going on in the contemporary apparel market and other markets with rising Chinese costs.

Paul Zaffaroni
Director of Investment Banking
Roth Capital Partners

The gradual recovery of the U.S. economy and lower cotton prices have improved the outlook for apparel manufacturers.

While the macro outlook is more favorable, the evolving retail landscape presents a new set of challenges. Consumers are spending more time online, socializing and researching products and trends, which is changing their shopping habits and the strategies for manufacturers and brands looking to connect with them.

Social media provides an opportunity to engage with the consumer, but it needs to be done carefully and with an authentic voice that is consistent with the brand DNA.

The more-successful manufacturers today either have a brand that resonates with the consumer or they offer the latest fashion at attractive price points, creating a “barbell effect,” squeezing those in the middle. This trend has become more pronounced as department stores continue to sign exclusive deals with brands and increase their use of shop-in-shop concepts. Manufacturers stuck in the middle are rethinking their strategies or are focusing on private label, which is less attractive if they are considering private-equity money or selling their business.

China is another area that presents an opportunity or a challenge for manufacturers and brands. Sourcing is still important, but today, brands are increasingly looking for ways to tap into the buying power of the “aspirational” Chinese consumer.

Neiman Marcus recently bought a minority interest in Asia-based e-commerce company Glamour Sales Holding, and QVC has set up a joint venture with China National Radio to operate a Chinese multimedia retailing business.

Many of the brands we work with also are focused on China, and we’ve been spending more time with the folks in our Shanghai and Hong Kong offices to help them figure it out.

*Brent Crude oil is combination of oil from several oil fields in the North Sea. It is used as a global price benchmark for crude oil.