INDUSTRY FOCUS: FINANCE
Fashion Seeks Financial Relief From the Fed in 2024
Fashion and apparel business owners hope that 2024 will be the year that yields positive momentum and economic recovery following years of inflationary pressures. Since 2022, business leaders in the U.S. have yearned for good news from the Federal Reserve, as the central bank charted a course to avoid a recession by increasing its rates, which led to a 22-year high in 2023 and now stand at 5.25–5.5 percent.
As fashion businesses and consumers wait to see how the United States’ central bank navigates 2024, California Apparel News asked industry leaders: When thinking about the potential for the Federal Reserve to cut rates in 2024, thereby moving inflation closer to the agency’s 2 percent goal, what does this mean for the fashion industry?
Western Regional Manager
CIT Commercial Services—a subsidiary of First Citizens Bank
Many fashion retailers and manufacturers experienced a challenging year in 2023 as they continued to work through excess inventory levels. Additionally, several fashion companies had to deal with lower demand as consumers shifted spending toward services and travel.
The consumer price index has fallen from a 9.1 percent pandemic-era peak in June 2022 to a much lower 3.4 percent level in December 2023. Meanwhile, the Federal Reserve is still trying to manage a delicate balancing act, working to engineer a soft landing for the economy while also achieving its 2.0 percent inflation goal. Many economists who were hoping for several rate cuts beginning Q1 now feel that reductions won’t begin until late Q2.
Debt financing has become more expensive the last three years, a cumulative increase of over 5.0 percent. Also, many companies have carried higher loan amounts to finance excess inventories. Inventory management has always been a key in this industry and even more so lately. Supplier diversification is also important as there have been global disruptions and geopolitical unrest for the last few years.
Overall, the fashion industry has been very resilient in the face of constant change. While lower interest rates will be welcomed from the expense side, business owners must manage their companies with the expectation that retailers will continue to order conservatively until consumer demand improves. Manufacturers and retailers should be prepared when demand strengthens.
Express Trade Capital
The data that have been coming out recently regarding both inflation and unemployment is most likely pointing to a reduction in interest rates during 2024. However, any potential reduction most likely will not happen right away. Therefore, apparel companies should continue to be very lean on expenses and nimble when it comes to inventory levels and turnaround times. With the additional concerns developing for merchandise flowing through the East Coast ports, it is critical that importers plan for additional expenses and delays if they are bringing merchandise to the region.
It is also quite possible that the merchandise redirected to the West Coast ports will cause delays and additional expenses for many other importers as well. All of these items need to be configured into updated cash-flow projections to develop a conservative interest expense forecast for 2024.
Executive Vice President and Western Region Manager
Rosenthal & Rosenthal
Should the Fed cut interest rates in 2024 that would be a modicum of good news for the fashion industry. The increases in interest rates in less than 24 months surged borrowing costs across the board. These increases were felt from commercial debt for businesses, including fashion businesses, to consumer debt such as mortgages, credit cards, etc. Therefore, any decrease in rates would translate to reduced borrowing costs and reduced interest expense.
The consumer landscape, however, is still rife with uncertainty. Despite inflation moderating, many consumers are still cash strapped with higher living costs such as gas, grocery bills, and mortgage or rent payments. Add to that the recent holiday season where credit-card balances increased in excess of an estimated $55 billion in December over a year ago and consumers have even less discretionary spending. And, of course, increased sales for the fashion industry generally relies—and depends upon—good consumer discretionary spending.
With other input costs increasing, including transportation as a result of global unrest in general and the Red Sea–Suez Canal turmoil, in particular, as well as increased labor costs with minimum wages increasing, it’s likely that any benefits businesses might see from a decrease in interest rates may be partially offset by these external factors and related cost increases.
The uncertainty surrounding consumer spending in 2024 along with increasing input costs makes it more important than ever to control operating expenses and have conservative inventory levels to be able to maintain or hopefully improve profitability.
Tae K. Chung
Senior Vice President Business Development
Republic Business Credit
There are several ways this type of significant decrease in inflation could impact the fashion industry. There is a great deal of cause and effect between the manufacturers and consumers that could produce favorable outcomes for everyone, such as increased product availability and lower costs. A drop in rates and inflation will benefit everyone who spends money—whether that be on apparel or groceries and other goods and services.
The entire supply chain would benefit from seeing a decrease in material, production and financing costs. If those rates decrease and remain stable, fashion companies may be more inclined to invest in new product lines, marketing campaigns and store openings. With a healthier, more stable bottom line, retail companies will likely begin lowering prices for consumers, inspiring greater purchasing power and consumer confidence.
With the cost of necessities also falling with inflation rates, consumers would have more disposable income to spend on fashion. This could boost demand for apparel, footwear and accessories, leading to increased traffic in physical stores and on e-commerce platforms.
Executive Vice President and Managing Director, Los Angeles Regional Manager
White Oak Commercial Finance, LLC
Many economists projected a recession to hit in 2023 given the Fed’s battle against inflation. Fortunately, the economy performed better than expected, growing at 3.1 percent for the year and the growth of inflation receding.
I recently attended a presentation by Dr. Jerry Nickelsburg, director of the UCLA Anderson Forecast. He is also generally optimistic about continued economic growth in 2024, stating he expects the Fed to keep interest rates unchanged in 2024, with a possibility of cuts toward the end of the year. This is all good news for the fashion industry.
Our advice to fashion companies is to keep an eye on unemployment figures and consumer spending. Negative changes to these indicators could impact the economy and therefore reduce discretionary income. More important than monitoring economic trends is knowing and anticipating the preferences of your customers. As such, we’ve seen successful companies increase their reliance on technology to monitor their KPIs in real time.
Head of Retail and Apparel,
U.S. Commercial Banking
HSBC Bank USA N.A.
The year 2023 can be described in the apparel sector as the year of the great inventory reduction. Too much product was manufactured in 2022, forcing production cuts. The need for reducing stock is a perennial issue, exacerbated last year with the steep rise in interest rates, making companies more sensitive to the monthly financing cost of all those full boxes on warehouse shelves. The industry is entering 2024 leaner and more disciplined on product with retailers taking a conservative stance on ordering for the second half of the year as well.
With expected rate reductions and a potential economic soft landing, this may result in wholesalers and retailers taking more risk on buying as the year progresses. This may not be a bad thing. An experienced fashion-industry chief executive once told me that, at a year-end budget meeting, his finance team proudly relayed how little excess inventory they had left to sell to off-price channels. The team was surprised to hear his negative response. In this executive’s view, the tight inventory position meant the designers weren’t taking enough risks creatively and the sales teams weren’t taking enough risks on stock levels and therefore may have missed sales. Obviously, there is a delicate balance so you don’t end up with masses of discounted goods, but the notion that the industry this year may be collectively too conservative is worth considering. Reduced rates may be one piece of the puzzle to spur some healthy risk and creativity.
Executive Vice President, National Sales Manager
Merchant Financial Group
At Merchant, we believe there is much more optimism in the market for 2024 than there was for 2023. Interest rates are believed to be cut, which will give much-needed relief to business owners who have been paying the highest interest rates in many years. In addition, it seems that the bloated inventory positions of both manufacturers and retailers from 2022 and 2023 are finally leveling off to a much more manageable position.
We don’t believe apparel manufacturers are totally out of the woods. They must continue to focus on cutting unneeded overhead and properly managing their inventory so they aren’t stuck with closing out merchandise that cannot be sold for a loss.
We have additional concerns about the troubles overseas suppliers have had as well. The apparel manufacturer must be sure to have a solid and reliable supplier who can deliver products on time and, most importantly, is open to working together if there is a retail pushback or hiccup. The retailer climate continues to be a watch, with some sectors and retailers continuing to struggle to stay afloat. With this uncertainty, credit protection for receivables has become paramount for apparel manufacturers.
There is still clearly a lot of uncertainty, and now is not a time to take risks. We believe we should have more clarity in the market by mid-2024, but that can change. The conflicts worldwide and the upcoming presidential election certainly will play a role in how the worldwide economy and apparel industry perform.
Richard H. Kwon
Executive Vice President, Portfolio Manager
Finance One, Inc.
The Federal Reserve’s dual mandate is to ensure maximum employment and price stability.
According to the Bureau of Labor Statistics, the unemployment rate remained at a low 3.7 percent, and the annual change in prices for all goods and services rose by 3.4 percent in December 2023. The Fed’s tightening policies seem to have had the desirable effect of taming inflation without plunging the U.S. into a recession last year, as many economists had projected.
The Fed is now signaling interest-rate cuts in 2024 and beyond to stimulate economic activity while aligning inflation with its 2.0 percent target. Lower interest rates may make borrowing more affordable, encouraging consumers to increase spending on discretionary goods like fashion apparel, while businesses increase production to meet demand. If the Fed’s actions contribute to overall economic growth and confidence, it could positively influence consumer sentiment, further supporting the fashion industry.
Despite the Fed’s uplifting decision to start lowering interest rates in 2024, the fashion industry is facing headwinds with uncertainty about inflation remaining elevated, geopolitical conflicts disrupting the supply chain and ever-changing consumer demands. To tackle these headwinds, apparel companies should focus on building resilience through cost management, inventory management and cultivating supply-chain partnerships vested in each other’s success.
Executive Managing Director, Head of Asset-Based Lending
Low interest rates clearly benefit the fashion industry from a few different perspectives. First and foremost, lower interest rates coupled with lower inflation—or lower than what we’ve recently experienced—will free up income to increase spending by the consumer, the primary driver for the fashion industry. In addition, the industry is capital intensive from the perspective of working capital, so lower interest rates will flow straight to the bottom line for companies who finance their inventory and receivables or put them in a position to better weather unanticipated increases in freight, duty or other costs. Fundamentally, the view that both interest rates and inflation are normalizing will likely bring stability to the economy, and that can only benefit the fashion industry and the consumer overall.
Dave M. Reza
Senior Vice President, Western Region
Milberg Factors, Inc.
The likelihood and timing of cuts is dependent on incoming data, especially indicators of economic activity, the jobs report and the Consumer Price Index report. On a positive note, retail sales significantly outpaced 2022 results even when adjusted for inflation. However, 2023 Q4 gains, while better than expected, were down from Q3, suggesting some slowing of consumer spending at year-end.
If the Fed does reduce interest rates, the impact should be positive in all sectors including retail, i.e., “a rising tide floats all boats.” The Fed could still hold the line on current rates if the CPI and labor results are not favorable. In addition, consumer credit-card debt is up significantly year over year, which could impact new consumer spending. Further, a recent poll of CFOs reflects a cautious outlook on sales growth and even a “lean” toward YOY negative results. The neutral to negative outlook from the CFO community and uncertainty as to the Fed’s future actions shows the news for the fashion industry is steady as she goes.
Kenneth L. Wengrod
Stealth Management Group, LLC
Consumer confidence is a pivotal force in shaping consumption patterns, particularly within the dynamic and ever-evolving fashion industry. The anticipation of rate cuts or shifts in the economic landscape can sway consumer spending in the discretionary realm of fashion, where purchases are guided by personal preferences, style trends and the individual’s perception of their financial well-being. The ramifications of these economic shifts extend beyond individual consumer decisions, permeating into the day-to-day operations of fashion retailers.
This impact becomes evident in critical areas such as inventory management, sales projections and overall business performance. The fashion industry has grappled with challenges arising from the allure of readily available capital as instances of excessively low interest rates have posed difficulties, potentially leading to over leveraging and a prioritization of financial engineering over sustainable business practices.
To navigate potential rate cuts successfully, the fashion industry is advised to pivot toward providing genuine value and authenticity to consumers. Building a brand anchored in authentic craftsmanship, ethical practices and a profound connection with consumer values becomes increasingly crucial. Focusing on these aspects enables fashion businesses to cultivate long-term customer loyalty and resilience against fluctuations in interest rates.
Rather than viewing the accessibility of cheap capital solely as an opportunity for financial gain, the industry should prioritize sustainable business practices that deliver meaningful value to consumers.
Responses have been edited for clarity and space.