As baseball legend Yogi Berra—all-time king of unintentional wisdom—once put it: “The future ain’t what it used to be.” Which means that when it comes to the economy the only certainty financial experts see in the future is uncertainty. So get loose and limber because agile will be the key skill to have between now and the end of the year.
For this edition of our recurring Industry Focus: Finance feature, we asked leading figures who cater to the apparel industry a simple question:
Given the state of the economy, what do you recommend your apparel clients do between now and the end of 2022?
Their prognostications are for challenging times but hardly dire, making it a perfect opportunity to get lean and mean, fit and agile. Heed their advice, as these answers will help you navigate the key fall and holiday shopping seasons.
Western Regional Manager
CIT Commercial Services
Last year most of our clients experienced strong demand for their product as consumers had disposable income and were eager to spend. Discretionary items such as apparel were in high demand both by consumers and retailers while apparel companies navigated through supply-chain constraints.
Throughout most of 2021, retailers took in product despite certain deliveries being late, as retailers needed goods on the floor to meet demand. This year purchases of apparel and other discretionary items have softened while retailers work through excess inventory. As a result of these high inventory levels, many apparel companies are facing deferred orders and cancellations.
In the current environment, companies with strong overseas supplier relations, or with local production capabilities, have been able to navigate these shifting inventory challenges better. Companies should continue to monitor expenses to make sure they are in line with future business. It’s also important to manage inventory levels closely as the cost of carrying goods has increased with higher storage rates, wages and interest costs.
Close consultation with your factor or other financial company can be especially valuable in challenging market conditions. Having the right financial partner can help sustain resiliency, support efficiencies and create the flexibility needed to take advantage of competitive opportunities.
Executive Vice President
Western Regional Manager
Rosenthal & Rosenthal
Effectively managing inventory—which should always be a priority regardless of the environment—and keeping costs in check are both critical right now. At best, consumer demand is unpredictable and seems to be declining as consumers with discretionary incomes choose to spend their dollars differently than they had been over the past two years.
So many apparel companies were focused on last year’s record-high sales and are starting to miss the mark on their 2022 forecasts because they didn’t anticipate the spending slowdown coupled with the inevitable inventory pileup. As a result, retailers are now trying to dramatically reduce their excess inventory by discounting merchandise, pushing out orders and even canceling orders altogether to prepare for the upcoming back-to-school and holiday seasons.
While consumer spending hasn’t quite bottomed out, with inflation still climbing and high freight costs—but at least seemingly stabilized—companies should be laser focused on cash-flow management. The retail market is softening, and we could begin to see customer credit problems crop up that we haven’t really seen since the start of the pandemic. So for companies struggling during this rough patch, having the right factor and financing partner in place to help weather the storm can make all the difference.
Executive Vice President and Managing Director
Los Angeles Region Manager
White Oak Commercial Finance, LLC
We’ve all seen the scary headlines discussing the woes of many retailers and the stories about how they now have too much of the wrong inventory. There are various factors driving this trend, but it all boils down to the ever-changing demands of the consumer.
The reality is 2021 was a mostly solid year for the majority of apparel companies, but some of the consumer demands changed more quickly than anticipated and caught some of the retailers by surprise. Manufacturers and importers may experience an uptick in dilution in the form of increased markdowns and allowances in certain categories as retailers try to rebalance and manage their inventory levels. We expect this rebalancing to continue over the next six to nine months. This trend became evident in the first quarter, when we started hearing of buyers pulling back on orders. As we enter the third quarter, the good news is that we now hear reports of the buying activity picking up again.
The best strategy to smooth out changing trends is to maintain a well-capitalized company and ensure you have access to credit lines to help bridge these fluctuations. During these times it is necessary to monitor each deduction to ensure it is consistent with the agreed-upon markdown money. It is also important to stay on top of timely payments of your accounts receivable.
Lastly, it is essential to monitor inventory levels and develop strategies that balance selling goods for the highest possible amount while minimizing carrying costs. These steps will help smooth out the cash flows and allow you to satisfy demands as we approach the fourth quarter and next year.
Senior Vice President
National Sector Head, Retail and Apparel
HSBC Bank USA N.A.
Turbulent economic times have an immediate impact on the apparel sector. Consumers shift purchasing patterns quickly and more so now with COVID-impacted work and travel habits and rising inflation. It has become apparent throughout 2022 that expectations for sales growth above and beyond last year’s levels were unrealistic. The impact of higher expectations was compounded by supply-chain issues that have resulted in ordering product earlier, making it more difficult to adjust to lower demand.
While we certainly are in a period of excess inventory, I would caution companies to not immediately react to the current environment as they may have done in prior recessions. In both 2008–09 and early 2020, consumer demand dropped precipitously and required significant action by apparel companies to stay on sound financial footing. So far the current environment is milder from a consumer-demand perspective but feels extreme to some due to the levels of inventory the entire industry is trying to digest.
We continue to hear from wholesalers that goods are selling, but retailers need longer than expected to take delivery and will ultimately follow through with purchasing the product. Select categories, including luxury, travel and occasionwear, have actually continued to see sustained growth. For the moment, we are not seeing the retail apocalypse that has been prognosticated in the past.
My advice would be to bring down inventory and orders anticipating lower demand but in a gradual and managed way that avoids the swings in product availability we saw across the industry throughout 2020 and 2021. Consumers may not be buying at levels we saw last year, but they are still buying. If companies have the capital and fortitude to hold out, I would expect we will see retailers and consumers return to more-steady demand in 2023.
President and Chief Executive
Greenspan Consult, Inc.
To say the least the economy is in a state of flux. I am not certain anyone knows what we are in for over the balance of 2022.
That said, apparel manufacturers and importers should keep in mind one important fact above all others: Stay liquid. When the economy gets tough, cash becomes king. Therefore I am advising apparel companies to minimize inventory speculation and risks.
Get liquidity out of excess inventories by selling off or doing promotional programs if you can. Be cautious of your new inventory purchases so you are only producing for confirmed, credit-approved orders. In uncertain economic times, credit approvals can be reduced or withdrawn. Do not take inventory risks on troubled retailers who lack credit.
Additionally, keep an eye on your accounts receivable, whether factored or in-house. During economic slowdowns you want to make sure your accounts receivable are being paid on a timely basis. Do not let your accounts receivable drag out past your normal credit terms. Watch your overhead costs monthly to make certain your expenses are not increasing. Do not let your overhead get away from you.
Overall, stay liquid, mean and lean. Those that do will be in the best position to take advantage when the economy gets going in the right direction.
Republic Business Credit, LLC
Apparel companies are bringing a lot of experience into the fall and are well prepared for the end of 2022. Across the board our brands are sharing how well the current inventories are selling through. However, the orders for the second half are below what they expected at this stage. Part of that is due to purchasing agents reading The Wall Street Journal a bit too much and almost wishing us into a recession.
As we have seen during the pandemic especially, it doesn’t impact each segment of the market the same way. If we get into a recession—or already happen to be in one—it always remains true that liquidity, cash flow and a solid financing partner will carry you through whatever the rest of the year might bring.
I would advise brands to be careful about over-ordering or stocking up on inventory, given the uncertainty of demand and pricing pressure due to rising inflation. The talk of tariff relief for importing, ongoing longshoremen’s contract negotiations and the seemingly never-ending supply-chain worries continue to benefit the more agile and adaptable brands.
As uncertainty looms, it tends be a great time to connect with your factor, bank or ABL lender to talk about customer credits and the best process for over-advance requests.
Dave M. Reza
Senior Vice President, Western Region
Milberg Factors, Inc.
It is difficult to script any more of a downside scenario for apparel companies than what they have already been through over the past two years. Today’s clothing companies have already managed to survive the pandemic, staffing shortages, ever-changing health regulations, shifting sales channels, and unprecedented freight costs and delivery challenges. How much more can they take? We just may find out as we head into the back half of the year.
June retail sales were slightly down when adjusted for price inflation but saw more significant deterioration at department stores. Inventory deliveries started to catch up in Q2, and we are now hearing of delivery pushbacks and cancellations. Hence apparel companies may soon see pressure from over-inventoried retailers for allowances and purchase discounts.
Consumers are still facing historically high gas prices. Mortgage rates and transportation costs and shortages are increasing. COVID-related production constraints are hurting manufacturing, especially in China. While shipping costs are coming down, they remain at historically elevated levels. These and other factors will continue to support high inflation, which will be attacked by higher interest rates.
It is hard to suggest that apparel companies do anything other than what they have been doing for the past two years. This includes culling old and slow-moving inventory; managing purchasing to support confirmed orders and sourcing via proven suppliers and logistics resources; and doing everything possible to be prepared for the unexpected by managing inventory and expenses while keeping debt in check. Whenever things get tough, you can’t go wrong sticking to the fundamentals like blocking and tackling.
Senior Vice President, Regional Credit Manager
Commercial Services Group
Wells Fargo Capital Finance
Prudent apparel companies are paying close attention to the current economic conditions and planning inventory purchases very carefully. Many brought in large amounts of inventory prior to Chinese New Year out of concern over continued logistics issues only to see major retailers reassess economic conditions and either push out or cancel orders. There’s a general sentiment that this may result in retailers chasing goods in Q3 in the event that they end up having to cut back too far.
Needless to say, the back half of 2022 has become very difficult to project. We continue to see inflation in the 9 percent range, but unemployment remains pretty low. Our economists do see a recession in early to mid-2023, although it’s not likely to be a severe one.
Given the challenges in projecting how strong the economy will be, it makes good sense for companies to lean toward only producing around confirmed orders while at the same time seeking ways to reduce production-cycle times to better respond to whatever needs arise in the second half of this year.
Kenneth L. Wengrod
Stealth Management Group LLC
The uncertain horizon of inflation, consumer demand and supply-chain issues are indicators that companies should have been taking proactive measures. Some areas companies should avoid are speculating on purchasing and building unsold inventory.
Looking to trim unnecessary expenses is key. Now is the time to regroup and analyze the shifting consumer markets. Taking a deep dive to better understand the untapped market of Generation Z and its preferences in merchandising—specifically relevant merchandise that’s authentic and captures sustainability and diversity and inclusion.
Companies need to focus on the ways to reduce the cycle time and size of their production runs to adjust to new consumer lifestyle demands. Considering the weakening dollar, it is also an excellent opportunity to broaden foreign sales. These days the methods of choice that point to better predictions for merchandising are data mining and ferreting out inconspicuous correlations utilizing smart algorithms and artificial intelligence.
Now may be the time to seize domestic production and take advantage of nearshoring with Mexico and Canada. Analyzing production expenses and lead times rather than fixating on labor costs is important. Management may discover its true costs are greater than anticipated, in large part due to delays in Asian production, logistics and unexpected shipping surcharges. Eliminating old methodologies to analyze, plan and shift to new consumer demographics is also key.