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Analysts Weigh Pressure on Vendors

NEW YORK — In the financial and consulting communities, industry observers agreed that vendors anticipated the slower sales during the abbreviated holiday shopping season, planned conservatively and positioned themselves well.<br><br>That...

NEW YORK — In the financial and consulting communities, industry observers agreed that vendors anticipated the slower sales during the abbreviated holiday shopping season, planned conservatively and positioned themselves well.

That won’t eliminate the possibility of a few bankruptcies and the probability that vendor consolidation will continue and possibly accelerate. Still, there’s a sense of relief that, between prudent planning and the involuntary inventory reduction brought about by the West Coast dock lockout, the poisonous influences of excessive inventory levels were avoided.

“I don’t anticipate that there is going to be vendor fallout because everybody went into the season very lean and mean,” said Lissa Baum, first senior vice president at Israel Discount Bank. “We may see some more markdown pressure, but most companies were buying against orders. Because it was already a shorter Christmas season, companies understood sales were going to be down and so inventories should be in line.

“Also, outerwear had a terrific season. The cold weather really assisted their sales. So that ends up being a very positive story. If there’s any impact, it will probably be felt in the luxury area. Concentrate on the higher end of the market. I think that’s where we’re likely to see the greatest effect.”

Steven Skinner, partner at Accenture’s retail industry group, believes the pressure on vendors will intensify from what were already intense levels in 2002.

“There will be greater focus on managing the cost of goods through more aggressive negotiations with vendors,” Skinner said. “We see vendors’ influence on retailers becoming even weaker — and it was already weak — and as a result, there could be some financial turmoil, which will result in bankruptcies and consolidation of the supplier marketplace.”

Skinner also foresees more pressure on vendors to develop more innovative and differentiated products to help boost retail margins. When products don’t move at retail, consignment looms as a greater possibility.

“I do believe you will see increasing demands from retailers to suppliers to buy back inventory that can’t be moved in order to make room for new merchandise in the stores,” he said.

Jeffrey Edelman, an analyst at UBS Warburg, said he doesn’t think the poor season at retail hurt the vendor community. In a research note to investors, Edelman wrote, “While sales results are not yet in, it appears as if most retailers were within 1 to 2 percent of plan for the five weeks of December and could end the quarter in a similar manner. Importantly, they are likely to experience some gross margin improvement because of conservative planning and easy comparisons. This would suggest most apparel companies could achieve targeted profits for the quarter. Stores have planned spring 2003 with a similarly cautious view, which could set the stage for sustained profit growth into the new year for many apparel companies.”

Specifically, Edelman wrote, Coach and Columbia Sportswear appear to be in the best position to achieve “at least a midteen earnings growth through 2003 and beyond” by generating sales growth internally. Moreover, he said Jones Apparel Group and Liz Claiborne could also see similar growth as a result of “the lean inventory pipeline and further opportunistic acquisition.”

Richard Hastings, chief economist at Cyber Business Credit, said that when all the data are in, he believes that total 2002 holiday sales will be better than most observers forecasted, but emphasizes that, in the long term, U.S. vendors continue to face extreme challenges.

“It is a difficult environment for domestic vendors,” Hastings said. “When sales slip at retail, it’s not the retailers who bear the brunt of markdowns and promotional activity. It’s the vendors who pay for most of this stuff. And more and more, the big retailers are successfully finding ways of getting product manufactured directly overseas. It is just not easy to be a vendor.”