California Financial Community Sees Challenges, Opportunities on the Horizon

There’s little question that 2008 will be a challenging year for apparel manufacturers and consumers alike.There were few bright spots in the 2007 holiday sales season, and many manufacturers will likely have significant markdowns in the first quarter of 2008.Apparel retailers are faced with trying to lure customers who may also be juggling high energy prices, high credit-card debt and rising housing costs.While the economic news appears grim, many in the financial community see opportunities for apparel companies well-positioned to expand as well as those just looking to ride out the storm.California Apparel News spoke with several members of the financial industry to discuss their forecast for 2008 and what advice they have for their apparel-industry clients. John F. DalyPresidentCIT Trade Finance Experience has shown that even in difficult economic times, consumers always find a way to spend. Having said that, retailers are conscious of the impact that rising fuel prices have had on consumers’ disposable income. With ever more of the consumer’s money going to gas and fuel costs, among other expenses, consumers have less to spend on consumer products. We also know that pockets of strength always appear. When consumer spending becomes tighter, shoppers look for more value-oriented merchandise to stretch their dollar further. On the other hand, brands command higher prices and continue to have a strong following among loyal consumers.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? My advice is to know your business, know your customer and do what you know best.Only make business commitments with parties that you are 100 percent certain are able to live up to your expectations. Focus on perfect execution. Align your company with a lender or factor that knows your business and can help you navigate the choppy waters ahead. If you don’t already use credit protection or factoring, this is the time to start using it. Thousands of apparel companies have found it to be a cost-effective way to manage customer credit risk and enhance liquidity, two key elements that are crucial to success in this market.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.?)Many people follow the unemployment figures, but I suggest looking at the employment figures instead. For example, if you manufacture career apparel, look at head-of-household employment; if you are in the teen business, look at teen employment. Other key indicators are the price of gas and the trends in mortgage foreclosures and credit card defaults. As I said earlier, the good news is that even in difficult economic times, consumers always find a way to spend. CIT Trade Finance (213) 613-2410www.cit.comJoseph EitelSenior Vice PresidentJPMorgan Chase Bank NAGiven the economic slowdown, 2008 may prove to be a challenging year for the apparel industry. If the economy continues at this pace, apparel manufacturers who are most at risk are those who produce domestically, rely heavily on domestic sales, produce discretionary (non-vital) products and have leveraged financial conditions.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? While the market view overall is cautious going into 2008, advice to clients depends greatly on each client’s specific circumstances. For example, a company that buys large volumes of second-tier branded goods for sale to mass retailers and is supported primarily by debt financing may want to scale back its operations and related debt in 2008. Given the probable competition of better-branded goods that typically flow into the marketplace during economic downturns, such a company is at a much greater risk today heading into 2008 compared to a year ago. By contrast, a well-capitalized company which has developed a meaningful brand and has an opportunity to expand its international operations may be prudent to do so in the year ahead.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?Similar to navigating trends in fashion, apparel manufacturers will need to carefully watch economic trends in the year ahead and consider how these trends may impact their customers, the retailers and the ultimate end user, the consumer. We witnessed the need for widespread discounting among retailers to maintain some semblance of sales volume growth during the 2007 holiday season. This was to offset economic hardship brought on by higher fuel prices and the credit crisis. While we hope both of these conditions will ease in the year ahead, manufacturers should be alert to other economic maladies that may be on the horizon. Such potential negative trends to be watchful for include a credit crisis spillover into the consumer debt market and rises in unemployment and inflation. While luxury-goods manufacturers have, to date, faired better than their moderate and value counterparts, continued weakness on Wall Street may adversely impact consumer traffic on Rodeo Drive and Fifth Avenue.JPMorgan Chase Bank NA(310) 860-7211www.jpmorganchase.comSunnie S. KimChief Executive OfficerHana Financial Inc.Although the threat of recession is looming on the horizon, most experts agree that the overall economy for 2008 will show very modest growth. However, the apparel industry will be put under greater pressure, as it is consumer-driven. Personal consumer expenditures account for 70 percent of GDP growth. Consumers are expected to further feel the effects of credit restrictions, brought on by the sub-prime situation, higher oil prices that will depress disposable income, uncertainty with respect to potential job losses and the upcoming elections.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? We are advising our clients to take a conservative stance, especially during the first quarter of the year. We are further advising them to keep their business lean, maintain low operating expenses and manage inventories as efficiently as possible. The current marketplace participants will have to be in a position to react and adapt quickly.Hana Financial Inc.(213) 240-1234www.hanafinancial.comDon MorrisonExecutive Vice PresidentGMAC Commercial FinanceWe see a very difficult retail environment and the trickle-down effect on the apparel industry, I think, will be felt pretty harshly. Manufacturers and importers will bear the brunt. They will be squeezed as the middleman in a relatively difficult time for retailers. There’s no middle class any more, so on the upper end the retailers will be fine and the discount end will be fine. It’s that middle category of specialty stores and the middle market that will struggle, [and] the apparel manufacturers and importers who supply to them that will have the more difficult time.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? We’re recommending a cautious stance. We are not recommending a conservative stance or aggressive but more cautious and informed. For example, we’re stressing that clients should de-lever their balance sheet, reduce debt and accumulate funds in anticipation of a more-difficult environment. We’re actively promoting that our best-positioned clients look for strategic opportunities to add scale via acquisitions. I think there will be some opportunities there.The more-strategic acquisition or scale additions that we think make sense are those where you can get product differentiation. If you’re able to differentiate your product, you’ll be able to maybe thrive in a market like this. If you can’t differentiate your product, it’s going to be very difficult. People should also look for acquisitions that really round out their product line and/or provide scale on an existing platform.We’re stressing the need for more-frequent business reviews internally, as well as with us, their lender, so any early warning signs for their specific business can be identified and addressed.

For prospects, we’re recommending clients look for lenders that have a steady hand and offer creative solutions in more-difficult times.We think that it’s important that clients and prospects be lined up with lenders that have experience going through numerous economic cycles and have the wherewithal to stick it out and help these businesses stay healthy.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?Clients should expect traditional asset-based loans, or ABL structures and those sources of liquidity, to start to dry up. That’s good news for us. But these clients will need to accept different structures—like factoring, for example—that allow lenders to have more hands-on information about their business. There’s been a time of easy credit and good economic cycles in which companies were able to tap into these standard ABL structures, and it was relatively easy to do. We think those sources of funds and those types of structures are going to dry up for a certain category of people in the apparel industry. They have to accept that other sources of liquidity—other financial structures—will allow the lenders to have more hands-on day-to-day knowledge and visibility and insight as to how things are going in the business.That’s the biggest financing issue that will impact the apparel manufacturers and importers in 2008. GMAC Commercial Finance(213) 284-3600www.gmaccf.comJim MorrisonPresidentFirst Capital Western Region Soft is the watchword for the industry going into ’08. We are entering a mild recession that could last six months.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? Conservative is our advice to our clients. Better manage your inventory and overhead.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?With a mild recession upon us, we must all be on top of all aspects of our business. Over time, the issues of ’08 are not specific to ’08; they all come and go from year to year. So we end up back at the watchwords of better-managed inventories and overhead. Pay more attention to how your goods are retailing and do what you need to help the retailer move the goods during a given season rather than waiting until the end of a season. Protect your dilution up front.First Capital Western Region(213) 996-2610 www.firstcapital.comDonald NunnariSenior Vice PresidentMerchant FactorsThis year projects to be a very challenging year for many manufacturers, similar to 2007. For most, sales and profits will be down. Banks are tightening on credit, and retailers are consolidating or closing stores. Recent closings include the The Gap’s Forth & Towne chain, PacSun’s demo chain, Talbots and Macy’s closing stores. Also affected are store closings in the Melrose area [in Los Angeles] and a general deterioration of payments by specialty stores. Having said all that, we are seeing more companies looking to factor to collect their receivables and offer more flexible financing terms. Also, with attrition and mergers, the well-positioned manufacturers who are bringing something new to the market are going to do very well.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? We are not regulated like a bank or large financial institution. As a privately owned factor concentrated in the apparel industry, we are here to support our clients’ financial needs. Our advice in these uncertain economic conditions is [maintain] consistent business principles, cut back on your expenses and don’t speculate on inventory. If sales are down and stores are pressuring you on price, you must reduce your overhead to survive. Invest your capital in what you do best. This is not the time to go in several different directions without the proper resources. The clients who are financially conservative even in good times have the financial wherewithal to withstand the difficult times. We will see more mergers this year as companies seek synergy with others to have a better chance to succeed in a very competitive market.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?Everyone hears the bad news about the economy every day. Despite all the negatives, the consumer has been spending. This year we will see cutbacks of major purchases by consumers, but the question is, How does the California apparel manufacturer benefit? There is a lack of a major trend in the market. Forget the bad news. The manufacturers bringing something new to the market will do very well. So, whether you are a manufacturer or a retailer, the challenge this year is creating something unique and different to get the sale.Merchant Factors(213) 347-0101www.merchantfactors.comSteven H. ReinerManaging Director Financo Inc.From the corporate side, I think we’re going to see a fairly active pace of M&A activity with a real focus on what I would call “tuck-in” acquisitions rather than “transformational” acquisitions.

Corporate or strategic [companies], for the first time in a long time, are facing less competition from private-equity firms as they look to buy companies. There are a great many young, entrepreneurial, early-stage $10 million to $400 million companies out there, which can be very logical and synergistic in terms of their fit into the corporate structures.

Tuck-in acquisitions, which can offer synergies and can help drive those businesses, can really leverage off the existing businesses. Maybe it’s a knit company that goes with a denim division. Maybe it’s a handbag company that goes with a footwear division. We think it’s going to be a fairly active year in that market.

Private-equity firms [have been] obviously enormously active over the last couple of years, as they’ve raised significant cash hoards. They have been very aggressive in investing both in this industry and of course in a variety of other industries.

[There has been] a lot of chatter in the market for the last six-plus months that with the trouble in the financing market, sponsors, in a sense, were going to go away.

There certainly are many challenges in the financing market—basically, the bank lending market. But don’t ever count the sponsors out. Sponsors are very bright buyers who are basically professional investors. They will always find an opportunity to capitalize on the marketplace to make what they and I would expect to be smart investments.

Specifically, I think you’re going to see a certain group of private-equity firms who are well-positioned for one reason or another to capitalize on certain markets [and] are going to be very active. These might be sponsors who have in-house financing capabilities. They are able to do a deal without the banks or fund the deal and refinance it down the road.

[For] a company that’s undervalued, that has great core DNA, [the opportunity to be] acquired very much is there.

What’s critical when you think about a company’s DNA [is] you always have to start with brand, where you fit in the marketplace. You have to think about the management team that has developed that company. And what are the opportunities for that company to grow. For companies that have that mix—and profits, of course—[there’s] always a lot of traction.

Depending on which market you’re coming from, the euro is particularly strong, relative to the dollar. The whole U.S. is on sale. We think the pace of the activity is going to increase.

[The] second thing is currency repatriation. Basically, dollars coming out of the Middle East and, to a lesser degree, Asia are going to increasingly find their way back into the United States in terms of asset acquisitions. You just have to look at the Barneys deal as an example of that. [Istithmar PJSC, a private-equity and alternative-investment firm based in Dubai, purchased the upscale Barneys New York retail chain for $945 million in 2007 after a summer-long bidding war with Tokyo-based Fast Retailing Inc.]

I think with regard to wholesalers versus retailers, you have a number of companies that are going to have significant chargebacks, particularly as you come into the early part of this year. From the Financo standpoint, those companies which have been conservatively capitalized, have reserves, are well-managed and are great brands will do fine, but they’re going to experience great challenges. Those who have perhaps not been as cautious in terms of their balance sheets, in terms of their retail relationships, they’re going to find this market very challenging. I think it’s going to drive some real opportunities and some real consolidation. What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? It always depends on what the position is of the client. At Financo, we have a broad range of clients [and] their businesses are all different, so we’re a little cautious to make a global statement. With that said, our goal is to be appropriately cautious. Our sense is that the market is going to be challenging. I don’t think this is going to be particularly long lasting, but that’s one person’s view. I think the choppiness that we’re going through is hopefully choppiness that will [end by] late 2008, early 2009. Either way, choppiness creates opportunity. We’re working with our clients to make sure that they are in a position to capitalize on opportunities that may be available in the market. It could be an acquisition. It could be a real estate deal to acquire stores. It could be an opportunity to gain market share at department stores as weaker vendors may lose their geography, or their footprint, within a retailer.

We’re telling our more-challenged clients that this is the right time, if they haven’t done so already, to think about your capital structure. If you’ve been living a little aggressively—maybe it’s an individually led business owned by a couple of entrepreneurs—maybe you reel it back a little bit and make sure the balance sheet is well-capitalized. Keep focused on cash flow. Cash flow is always the key. Conservative, realistic, but optimistic. What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?You talk about the China safeguards and imports; that’s a big one. But there’s something else going on in China, which is beginning to be talked about as being important. That is inflation in China and, tied to that, appreciation of the yuan. We in the apparel industry have collectively lived with real apparel-price deflation for [some] time. Certainly from a consumer perspective, that’s been a good thing. Our sense is that with increasing rates of inflation out of China, the Chinese government [is] under considerable pressure from the U.S., from the EU, from other major governments and related entities. I think this is going to be particularly relevant in footwear. Footwear is so concentrated, and it’s so much more complex to manufacture than traditional apparel. We think that from China you’re going to have the issue of price inflation, which is going to cause some real rethinking of the value chain. Certainly the euro has caused real challenges with footwear vendors. As the euro appreciated, retail prices in the States have moved accordingly. If you are an Italian-oriented vendor in terms of your sourcing—leather accessories, footwear, etc.—while you have room to run as a certain rarified group of vendors, you still have a limit. Because your underlying consumer is now putting $75 or $100 a week of gas in their car and facing everything else they’re going to face, there’s a limit to what they’re going to [spend].

The economy has proven to be incredibly resilient around energy prices. With that said, I think you’re at a point where a dollar coming out of a consumer’s wallet on a weekly or biweekly basis—however often they fill up the car—has gotten to be so significant that you’d be naiuml;ve if you don’t think gas prices matter.

Apparel is important, but, for the most part, it is discretionary. You need winter apparel in the winter and summer apparel in the summer, but the fashion element of apparel is certainly discretionary.

I don’t want to paint a draconian picture of it. The American consumer is an optimist and believes that tomorrow is going to be a better day economically than today. Knock on wood, generally they’ve been right. So we are cautiously optimistic.

You just have to look at the numbers that came off of holiday sales. There were some guys that did well. Some other very good, value-oriented retailers had good numbers. But traditional department stores posted some pretty bad numbers.

As long as the employment numbers are good, I would expect the economy to be relatively good. Again, there’s all different types of recessions. As long as the economy is relatively good, the consumer market will be fine. And from the Financo perspective, we are working closely with our clients to be realistic about the market; we want to be cautious about it. But cautiousness breeds opportunity because it means you have the ability to capitalize on whatever opportunities the market presents. In terms of the opportunities for mergers and acquisitions in the next year, how are West Coast firms positioned in that respect? I think we all agree that the West Coast is a hotbed of fashion, of innovation and creativity, and entrepreneurial drive. Whether it’s the market leader, as I might suggest, or whether it’s part of an important chain, like others might suggest, it clearly is a very dynamic, very rich market.

One of the things that happened over the last couple of years is because of the pace of M&A activity—Southern California companies being bought and sold—has been so healthy and so vibrant, that unleashed even more entrepreneurial fervor. It only takes one pick-your-company-fill-in-the-blank to get people to say, “Hey, there’s a real opportunity to do something here.”

You just have to look at how fervent our denim market is to see that the pace of innovation, the pace of formation of new companies, new brands, has accelerated over the last couple of years. There’s no shortage of supply here. In fact, it’s expected to increase. So then you have to flip it around and say, “What’s the demand like?” Demand is very good. Over the last couple of years you had a small handful of large strategic buyers trying to buy almost anything they could to maintain their own growth. I think now as the stock market has pushed back, as valuations have been beat up, as boards are under increasing pressure to generate appropriate returns for shareholders, management teams and boards are being judicious with their money. They are not indiscriminately buying; they are clearly focused on tuck-in, logical, strategic deals that fit an existing infrastructure and have a real operation reason for being there.

A lot of these Southern California companies are great fits. The enthusiasm for these companies remains very high. The question then becomes one of value. Value is probably the hardest part of the equation to master. You probably have a little bit of a period of adjustment coming. So, values have come down from their peaks—this is a very broad comment; there are always guys ahead of the curve and there’s always guys behind the curve. But clearly values have come down from the peak, but there’s still underlying demand. The question is if the buyers are looking at lower values, what do the sellers think? One of the things that we’ve noticed is I think sellers are being fairly realistic about the marketplace.

In apparel—where every fashion season it’s a whole new game, a whole new business—the smaller companies, the entrepreneurial companies, they know exactly what the market looks like every day. Unlike the seller of a home, where price is a theoretical issue, an apparel vendor every day is living in the marketplace. If they are dealing with margin compression, if they’re dealing with markdown issues with their retail partners, they get realistic very quickly.

Every situation is different, but I think in part there’s a certain part of the vendor or seller who’s thinking about a sale who’s thinking, “You know, this maybe isn’t a bad time to sell because the future is uncertain. I can still get a pretty good price. Maybe not the top of the market, but I know that the operating environment is challenging, so I’m going to sell.” I don’t think we have a giant disconnect in this marketplace. I think sellers’ and buyers’ sense of value are moving fairly well in unison. Buyers always want to pay less and sellers always want more, so I’m not saying dollar-for-dollar everything moves in a perfect line, but unlike real estate, I don’t think you have a standoff where sellers are saying, “I want what my business was worth two years ago.” Financo Inc. (310) 550-5800www.financo.comDavid RezaSenior Vice President, Western RegionMilberg FactorsWe have a credit crunch not only affecting the subprime and mortgages but also the big investment banks. A lot of them that are in the news, like Citicorp and Merrill Lynch, are seeking new capital from investors offshore. So it’s a pretty challenging outlook.

In an election year, one would think the incumbent administration would try to have good news where possible to help out Republican candidates. We’ll see what happens.

Our clients don’t usually come to us and say, “What would you advise me to do?” Typically if we see a client having problems, often it is the textbook-type problems: unsold inventory, expenses too high, margin erosion. And these are things that all companies in the apparel industry and textile industry fight. We try to share experiences from other clients. [We will say,] “We have a client who is in the same segment of the industry as you, and they had problems doing this, and this is how they dealt with it.” Our job is to share that information. We might say, “For this year, you should stay focused on your core strengths and eliminating any weaknesses.”What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? I don’t want to sound too conservative and I don’t want to sound too aggressive. I don’t think it’s business as usual, but if a client asked me I would suggest that, given what we saw at retail over the holiday and some of the news that’s starting to come out now on the economy, this may not be the time to go into uncharted waters. I hate to say play it safe, but certainly [manufacturers should] do what they do well and play to their strengths. I wouldn’t venture into any big commitment for inventory that’s unsold. I’d be careful with my suppliers. What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?As far as the key issues, we had the safeguards ending. There are experts in town who say that some of the safeguards would probably be renewed. So we’ll wait and see what happens there. But since some of the quotas have ended in the last couple of years we’ve seen a pretty significant increase in importing of apparel and textiles. The price of doing business in China is starting to rise and other countries are stepping up. A lot of our clients are looking to Vietnam and places like that.

As far as the other factors, gas, maybe we’ll see $4 a gallon this year. The price of oil is over $100 a barrel. With all these credit issues and consumer debt being pretty high, as a consumer myself, I would think there’d have to be some effect on retail sales.

Our clients have done pretty well. For the most part, they’re taking the approach of “We’re going to wait and see, but we’re going to be careful.”

Companies that have achieved a certain level of success, maybe they are afraid of risking some of that position with a lot of experimentation. [So they] stay with the tried-and-true, which opens up a lot of opportunities for others.

We tell our clients you’ve got to focus on your business. You’ll see companies where they’ve had success and people get focused on outside activities. [In this] business environment everything has to be reinforced and worked on and worked on that much harder for the next season. That’s what we see with our clients. They constantly are scrambling to stay vital and viable to the customers.

It’s interesting what we’ll see in the next few years from Asia. There’s so much money and capital [there. Will] the businesses in L.A. be front-end design and sales but really everything else will be abroad? That’s an interesting dynamic. Milberg Factors Inc.(818) 649-8662www.milbergfactors.comBret Schuch Partner Goodman FactorsI would love to spin a lovely yarn about how great things will be for apparel merchants in 2008, but I’m not sure I could do so while keeping a straight face. Disappointing job growth (December payroll growth was the worst in over four years) and rising unemployment (at 5 percent, the worst since [2005’s Hurricane] Katrina) should keep the industry in its present downward trend for at least the first six months of the year. Another contributing factor is the abrupt stop down of new home-equity lines of credit, the availability of which had fueled consumer spending over the past several years.Certain market segments may come away unaffected (luxury brands, for example), but good fortune for the most part will become the exception in 2008.What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? Business as usual, however those that manage their overhead and minimize reliance on inventory on hand will stand the best chance to make the best of what we expect will be a moderately difficult retail economy. Outsourced labor and services are a good idea—in fact, factoring can be part of that solution.What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?Look for the retailers to even further intensify their dependence on vendor charges and product returns in order to make their margins. Don’t over-commit to any one merchant. Keep your customer base and product base as diversified as possible. Explore other retail channels, including direct-to-consumer sales through your own controlled Web site. Goodman Factors (972) 241-3297www.goodmanfactors.comKevin SullivanExecutive Vice PresidentWells Fargo CenturyThere’s really no question that the continued weakness in the housing market, fuel prices and concerns about the stock market are having a negative impact on the apparel industry. Retailers generally reported a pretty sluggish Christmas season. We had Target, Macy’s, [JC]Penney and Kohl’s all posting declines in December, which historically tends to lead to higher levels of chargebacks in January and February the following year.

Despite that, I think it’s also important to note that the housing market has really been in decline for a couple of years now. Realistically, even if it declined another 20 percent this year, prices would still be up significantly for the decade.

If you look at unemployment—even at 5 percent—it’s not that high, and interest rates remain at a level that’s still a four-decade low with the possibility of an additional half-point cut at the end of this month. We don’t think this year will end up being a great year, but we also don’t think it’s going to be as bad as some are forecasting it to be. What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? We’re advising our clients to take a conservative stance as it relates to inventory. Where we see problems is with clients who have gotten themselves into over-inventory positions at a time when retailers are becoming more conservative. I think it’s important to point out that we still see a number of companies doing very well—that continues to be more on the high end of the marketplace. I think it’s also important to point out with the continued weakness of the dollar overseas we’re also seeing clients showing some pretty solid increases in exports. So, it’s kind of a mixed bag; it’s certainly not all bad news. We just think it’s prudent for companies in the apparel industry to watch inventory levels closely. What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?Ultimately manufacturers need to stay focused on the housing market and energy prices. We think the housing market is going to remain weak, but it becomes a question of how much more it will continue to decline.

[Looking] at fuel prices, gas prices in particular—$3 gas has really been with us for a while, so I don’t think it’s going to be a significant problem in 2008 unless some unforeseen event causes a significant spike in prices.

With 2008 being an election year, we think the government will do whatever is necessary to pump up liquidity within the marketplace, so we expect a pretty favorable interest rate environment, and that should be positive for business. Wells Fargo Century(866) 703-4932www.wfcentury.comKen WengrodPresidentFTC Commercial Corp.I believe the contemporary and premium markets will continue to remain strong. When we go into a weaker market, customers are not as loyal as people think they are. Especially when discretionary income starts to disappear, they’ll choose the best value and get the best they can for the dollar. Yes, in part, we’re going through a weakening economy. But wherever there is a so-called negative, there is tremendous opportunity.

Companies have to look at what we’re going through and see how they can make their businesses more robust. There are definite markets that are expanding very rapidly.

Because of the weakening dollar, exports are an extremely important component to the apparel industry today. Look at the markets in Europe, in Asia, in Africa, Dubai [and] even Moscow. [In] those markets, our weakening dollar makes our products even more in demand—especially fashion products.

There’s still strength to our market. We have a very strong balance sheet, in general. What stance are you advising your apparel-industry clients to take in 2008? Conservative? Aggressive? Business as usual? When we’re in this type of a market, the most important things they can do is to constantly look inwardly and look at some of the greater resources, which is the human resources. In this market particularly, it’s imperative that they take advantage of continuity of staff and watch expenses, look at their borrowing, look at their lending, look at any extra charges. We’re in a nickel and dollar and penny business, and they need to look at every expense and reexamine it to make sure it’s beneficial to them. From financing to buying fabric, whatever their production costs are, they need to look at all expenses.

Domestic manufacturers have a window of opportunity because of quick turn. If they keep their costs down, the domestic manufacturers could compete with the foreign suppliers because of the quick turn—if they keep their fixed expenses down and be very competitive on the pricing and give the stores what they need. Because the retailers today are going to be trying to work on lower inventory levels.

They should be looking at keeping inventory levels down. They should be looking at optimum inventory levels and keep their costs down. Because if they have inventory, that means they’re going to have to borrow to support that.

They should be looking at their booked versus shipped positions and look at certain styles and take advantage of where they see the market going, where the opportunities are. It’s very important that they develop very strong vendor relationships so they pull exactly what they need for inventory and keep optimum levels. People are willing to work together these days. It’s good for both parties. What are some of the key issues apparel manufacturers should watch in 2008 (e.g., the end of safeguards on Chinese imports, rising gas prices and the effect on retail sales, the presidential election, etc.)?I think they really need to look at their relationships with their customers and be cognizant of not over-shipping, be cognizant of potential disputes, be cognizant of what’s going on at the retail level and protect their best interest. You want to make sure there’s strong sell-through at retail. Keep that desire to come back to you for more and more. [Don’t] get into a position of over-shipping the customer. If the customer doesn’t sell it, they’re going to try to find ways to give it back to you. We see tremendous growth in luxury retail. But there’s going to be margin erosion in the lower markets.

[Manufacturers should] protect themselves going in and not be overly aggressive in selling and shipping merchandise. Make sure there’re orders; make sure you monitor the sell-through at retail. When you feel [the retailer is] at their capacity, don’t try to sell them. Obviously, try to get into the A stores. Keep that sell-through as high as possible. They have to be very cautious on looking at margin erosion because once it occurs, how do you get it back?

In a down market, when people are potentially struggling individually on their personnel side, [companies] should look to tighten up their internal security. [For example, for] mid- to small-[sized] companies, the bank statements should come to the owner’s home, and they should open them individually. If they’re getting more sophisticated, they should employ “positive pay” with the banks. The accounting department advises the bank what checks were issued, check number and amount. When the check is cashed, if it doesn’t match that, it gets rejected. It’s called “positive pay,” and it’s critical that clients employ this. It’s a way to protect the owners.

It’s very important that they know not only the outstanding checks but how much they have in un-issued checks and what’s the numbering sequence. Because all it takes is one blank check [and thieves] know the ABA number, the sequence and the style of check. An outside person could replicate it.

You want to make sure your data is secure. There’s so much abuse on the Internet internally when employees should be working. You should put certain safeguards on Internet usage. Right now owners need to be as progressive as they can in terms of the performance of all their staff. It really matters [that you have] the right people so you don’t have to micromanage them. Human resources is a major capital for companies. A lot of people don’t look inwardly and take care of the right people. When you’re in a soft market, you have to look at everything. FTC Commercial Corp. (213) 745-8888 www.ftccc.net