California Apparel News

Even muscleman Arnold Schwarzenegger may not be able to strong-arm California’s economy back into fighting shape until the middle of next year.

Although some positive signs abound for California’s apparel industry—namely brisk order writing at Fashion Coterie and Designers & Agents in New York and at the Los Angeles Junior & Contemporary Majors Market in Los Angeles (see related story on here)—economists are predicting a slow recovery in the state until at least mid-2004.

“There are indicators that the national economy is slowly making the turn, and we will wait and see what happens with California,” said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. “Do we lag or what? We have a lot of unknowns.”

In a recent LAEDC report, Kyser and his colleagues noted that California’s economy will struggle to get traction during the rest of 2003 and into 2004, even with a new governor in Sacramento.

Other economic gurus agreed.

“Don’t overestimate the influence politicians have on the economy in the short run,” observed Christopher Thornberg, senior economist with the UCLA Anderson Forecast. “The state is getting hammered because of the tech bust and the general economic malaise in the U.S. Overall, to think that Arnold could make a difference in the short run is ridiculous.”

It will take a while for California’s finances to turn around. Strikes by two groups, Southern California’s grocery workers and the Metropolitan Transportation Authority employees who run the local buses, have not helped. The strikes will affect the spending power of many middle- to low-income workers who are losing income while they are on strike or locked out from their jobs.

State employment figures are improving very slowly. A recent UCLA Anderson Forecast report noted that nonfarm payroll employment in California will grow 0.3 percent in 2003. The report predicted this slow recovery will impact 2004, which will yield a meager 1 percent job growth rate. The job growth rate will rise to 2.2 percent for 2005, according to the report.

The job picture in Los Angeles County’s apparel and textiles industries is particularly grim. In Los Angeles, apparel employment declined about 10 percent in the last year, dipping from 72,500 jobs in September 2002 to 65,400 jobs in September 2003. The Los Angeles textile industry fared worse with an 18 percent drop. In September 2002, 12,100 people were employed in textiles, compared with 9,900 in September 2003.

Ilse Metchek, executive director of the California Fashion Association noted that the Southern California apparel industry is seeing retail sales on the upswing right now because of pent-up consumer demand and the need to replace worn clothing. But, she said, government regulations are keeping employment from expanding. “The single largest problem is that people are not hiring, even if they have to,” she said.

China continues to grow as a strong competitor in apparel manufacturing. During the 12-month period that ended on Aug. 31, China for the first time overtook Mexico as the number one foreign apparel and textile supplier to the United States, controlling 17.4 percent of U.S. imports. Mexico has 9.8 percent of the U.S. import market.

Hardships remain

California’s elimination of the manufacturers’ investment credit at the end of the year will not help the state’s manufacturers. The tax credit, which has been in existence since 1994, gives manufacturers a 6 percent investment tax credit on qualified property or equipment that is purchased, acquired or leased for use in California. Legislators decided to do away with the tax credit to add about $350 million to $450 million a year to the state’s shaky budget.

No one expects the workers’ compensation insurance problem will go away. Drastic increases in premiums may not be in the future, but drastic decreases are also not anticipated.

And starting on Jan. 1, 2004, employers will be obligated to give six-weeks paid family leave to employees and contribute more to the state’s unemployment insurance fund.

Silver lining

But there are some rays of hope on the horizon. A recent Chapman University survey of state purchasing managers showed a significant growth in production and new orders in the third quarter over the second quarter of 2003. The composite index in the third quarter was 63.3, up from 47.5 in the second quarter and the highest rating since the California survey was launched more than one year ago.

“The major improvement was in high tech,” said Raymond Sfeir, the economic professor in charge of the survey. “This was a group that has been really down for more than two years. Now it looks like there is some fire over there.”

Retail sales were a bright spot, too, with this sector coming off a strong September performance. It remains to be seen whether this is a sign of overall economic recovery or just serendipity.

Cold weather in certain parts of the nation, tax benefits in the form of the child tax rebate (up to $400 per child) and a steadily improving stock market all contributed to the solid performance. September, which saw a 5.9 percent rise in retail sales, was the strongest month since March 2002, according to the Bank of Tokyo-Mitsubishi, which tracks 77 chain stores.

The National Retail Federation (NRF) is now projecting a 2003 retail sales growth of 4.1 percent, for hard goods as well as apparel. This prediction is up from the organization’s July projection of 3.5 percent.

“The long-awaited bounce in economic activity has finally arrived,” said NRF Chief Economist Rosalind Wells. “While we had forecast a pickup in the second half of the year, this kind of strength was not anticipated.”

However, sustainable economic recovery will be evidenced by improvement in the field of labor, said Kurt Barnard, retail analyst and creator of Barnard’s Retail Trend Report in Upper Montclair, N.J. According to Barnard, there are more than 2 million Americans who have been out of work for more than half a year and 5 million who have been working on a part-time basis because they can’t find full-time employment.

“They’re like the disenfranchised,” he said. “They’re not going to go on buying binges for the holiday season.”

The hot retail sectors are split between the high end and the low end. Discounter Target Corp. showed an increase of 5.4 percent in September same-store sales, while luxury department store chain The Neiman Marcus Group Inc. showed a 13.6 percent gain.

Meanwhile, specialty apparel retailers are “covering themselves with glory,” Barnard said, “because they know who their target customer is and aim only at that customer.”

Mid-tier department stores are not faring as well, failing to accurately identify their customers and suffering from competition from discounters moving up market, he said.

Barnard said he believes the holiday shopping season will show a 3 percent to 4 percent improvement in same-store sales. Overall, he expects 2003 retail sales to grow 3 percent over last year’s sales, in large part because of the success of Wal-Mart Stores Inc., which in September saw overall sales increase 13 percent over the same period last year.

Popular shopping areas

Limited retail space in hightraffic markets is keeping the Southern California real estate market strong heading into 2004, reported Los Angeles–based Grubb & Ellis broker Myron Sokolsky.

“It’s getting better than not,” Sokolsky said. “The availability of good retail properties is tight, and retail for the most part is still strong.”

Sokolsky noted that the emergence of mixed-use properties along La Brea Avenue in Los Angeles and in Hollywood, where developers are rehabilitating lower floors of older buildings into retail/commercial spaces and upper floors into residential spaces, is also creating demand. But all this activity has not done much to spur lease rates. “Rates have been steady and haven’t really declined or increased,” Sokolsky said.

Some of the properties in Grubb & Ellis’ retail portfolio include space in Westwood for $39 per square foot, in Venice for $30 per square foot, in Encino for $48 per square foot and in Beverly Hills for $57 per square foot.

Industrial space in hot markets such as the Vernon/Commerce corridor remains tight, with vacancy rates at about 5 percent. Properties in this area are leasing for approximately $5 to $6 per square foot. Higher rates can be found near the Los Angeles International Airport—about $10.20 per square foot for space with freight terminals, according to Grubb & Ellis.

Design driven

Designers reported strong orders at the Fashion Coterie and Designers & Agents shows in New York earlier this month—sparking optimism about the upcoming Los Angeles Fashion Week.

Darren Gold, co-designer of Los Angeles–based Mhope and president of the Coalition of Los Angeles Designers (CLAD) said last quarter was slow. “Buyers either ordered less or were holding back,” he said.

But at Designers & Agents in New York, Gold said he and design partner Marla Folbe “did the best [they] have ever done at a New York show.” They opened several new accounts and landed orders from a few retailers who had held off buying the line last season, Gold said.

Other CLAD members showing at D&A or Fashion Coterie reported similar strong sales, Gold said, noting that labels Eisbar, Coco Kliks and Monah Li had great shows in New York.

Gold said he was hopeful that the New York orders were a harbinger of strong sales during Los Angeles Fashion Week.

“The signs are heading in that direction,” he said. “I have a good feeling about the Los Angeles shows.”

Los Angeles designer Nony Tochterman was similarly enthusiastic after returning from Fashion Coterie, where she showed her latest Petro Zillia collection.

“It felt like for the last year, the buyers were playing it safe,” she said. “People are getting into color again. At Coterie, it seemed like they were into fashion again. Coterie is like the indication for the season, and it seemed like we are on the right track. When all was said and done, I had a big smile on my face.”

Business recently began to accelerate heavily at Madison, which operates five contemporary and young designer stores in greater Los Angeles, according to owner Mark Goldstein. August brought his best month in years, with sales up 40 percent over August 2002 sales. September brought an increase of about 20 percent, and Goldstein expects gross sales for 2003 to be up 25 percent.

He isn’t blindly optimistic, however.

“I don’t think we’re out of the woods yet,” he said. “But I think Spring is going to be very good—lots of color. Happy clothes.”

Technical times

Apparel companies will continue to plug into technology.

“I see technology trends staying similar to this year,” said Alan Grinberg, owner of San Francisco–based AG Systems, which markets software to manage inventory control, accounting, order entry and production control. “Companies are approaching technology much stricter than they did a few years ago. They want to see a payoff and an enhancement to their bottom lines. It’s not just about having something cool. The things they are looking for are to make their jobs easier, to save some key strokes.”

Grinberg predicts incremental advancements in technology. “We’ve already achieved 80 percent to 90 percent of the improvements with computer technology, so you’re going to see smaller steps instead of bigger ones,” he noted.

Enrico Turconi, president and chief executive officer of Westlake Village, Calif.–based Porini USA Inc., said his company has “a very positive outlook for the foreseeable future” despite the generally slow economy. Porini markets business management software.

“We are seeing that many companies who had cut back on IT spending in recent years have missed out on good return on investment opportunities and now have a more pressing need to improve their systems,” Turconi said. “Most of our activity is with clients who are looking for complete, integrated solutions that enable more effective planning, lean operations and speed to market.”

John Murphy, chief executive of Murphy & Associates in Glendale, Calif., which markets ApparelMagic enterprise resource planning software, said apparel companies want to boost their investment in technology but are looking for creative ways to bring technologies into their companies without big upfront investments.

“Apparel companies, whether they’re start-ups or more established, are looking for more staged implementation,” Murphy said. “They want the support, flexibility and service now but want to spread out the financing—almost like they want it to pay for itself right away. The good news is that they’re not saying they don’t want the technology.”

Retail Editor Christian M. Chensvold, Technology Editor Robert McAllister and Executive Editor Alison A. Nieder contributed to this report.