By  on September 10, 2008

Mainstream vendors are hoping another shoe — or, in this case, retailer — doesn’t drop.

After a summer that saw three major retailers file for bankruptcy, the small-to-midsize vendors that supplied them are debating whether to continue shipping the troubled stores, how to make up the lost business by diversifying to become less mainstream and, in short, survive.

The tenuous position of mainstream retailers in today’s economy became painfully clear this summer after Goody’s, Mervyns and Boscov’s delivered a one-two-three bankruptcy punch, followed by the dismal numbers last month from Belk and Dillard’s. The mainstream customer, strapped by higher gas and food prices, is more price sensitive and reluctant to spend discretionary income than ever, and mainstream vendors are finding themselves in a similar position.

Although the giant public firms such as Jones Apparel Group and Liz Claiborne Inc. are taking the bankruptcies as though they were a blip barely noted on their radars, vendors that do millions rather than billions in sales are painfully aware of every credit risk and closed door.

As mainstream retailers attempt to regain their legs, the bankrupt triad has revealed plans to collectively close 20 percent — or 115 out of 580 — of its doors. For the thousands of moderate and better vendors that supplied them, orders certainly will be less, but the bigger question for them is whether to continue shipping these stores: On one hand, there’s a risk that they may never get paid for the merchandise, but on the other, they don’t want to push another of the ever fewer retailers out of business — or lose the business from those orders. Faced with this dilemma, many vendors are still choosing to ship the Boscov’s and Goody’s of the world, which, combined, typically make up around 5 percent of their revenues.

Everyone expects fallout from vendors having their worst year on record, ranging from having to sell their companies to even closing shop. Companies are trying to save themselves by diversifying into higher-end lines that they hope have more future than the troubled more moderate market.

The Hampshire Group, a $300 million predominately moderate knit company that did 5 to 6 percent of its business with Boscov’s, Mervyns and Goody’s, is still shipping those accounts, but is making smaller shipments more often to hedge its bets.

“We’ve been doing business with those three companies for many years, and it’s unfortunate that all three are happening at the same time, because it’s really difficult to look at the risk in aggregate, as opposed to one situation that can be easily managed,” said Hampshire president and chief executive officer Michael Culang. “We’re handling it very gingerly and doing as much business as we can with them because we are sympathetic, but we are also working closely with their finance people to make sure we tread carefully — communication is very frequent because their situation can change. The last thing they want to do is hurt us, because we’ve been partners for many years.”

Steven Feinstein, president of ICE Apparel, said the company did less than 5 percent of its business with Mervyns, so he said the risk was manageable for his business, which also sells at Macy’s, Bloomingdale’s, Nordstrom, Dillard’s, Belk and J.C. Penney. But that doesn’t mean he isn’t feeling the stress.

“It’s very difficult because people immediately assume when a retailer files bankruptcy that the credit issues will be cleared up, and they are really not,” Feinstein said. “Mervyns has a limited credit facility, and it’s very difficult to decide what to ship and what to be careful with. We’ve held back shipments and canceled orders. We want to be supportive and try to help them get back on their feet, but it’s a big risk to produce all this merchandise when there isn’t going to be credit available.”

H.M.S. Productions Inc., which owns better lines including Cable & Gauge, renegotiated to keep shipping Boscov’s after the retailer’s bankruptcy. H.M.S. sold better-priced knits, dresses and sportswear to Boscov’s, and its product was in all of the retailer’s doors. H.M.S. president Lou Breuning declined to quantify the volume done with Boscov’s, but called it substantial.

“We’ve been very fortunate making arrangements with them to ship them again, so we haven’t missed a beat,” Breuning said. “Good partners are hard to come by.”

Rousso Apparel Group, a predominantly better vendor based in New York, has done business with Boscov’s for years and is continuing to ship the retailer, which ceo Victor Rousso called a “true partner.” Additionally, although Rousso had not done business with Goody’s for the last two years, the firm agreed to ship Goody’s in the next two months because the retailer changed its assortment planning and Rousso thinks the “risk is minimal right now.” But he’s wary of credit land mines in the retail environment.

“The margin pressure we have experienced in the last few months due to the weak dollar and increased costs and a weak economy hurting retail sales made it impossible to ship any accounts that are questionable credits,” Rousso said. “We cannot afford to be exposed to any risk. I think the retailers and banks all understand this in today’s market.”

Rousso said the company has “kept our inventory extremely lean through the end of 2008…to handle any unforeseen credit problems and allow us to move the merchandise to other customers if needed.

“We plan the future to be flat in terms of sales, but we are buying very conservatively and not taking any risks right now,” Rousso continued. “We are not looking to make a lot of money, but most important, we don’t want to lose any money.”

Moderate label Only Nine had sold Boscov’s for more than a decade, according to Only Nine president Jamie Gorman. The New York-based brand had been shipping the retailer $150,000 worth of product at retail each month in all divisions (misses’, petite and plus-sizes) “until our bank wouldn’t factor them anymore,” Gorman said. Only Nine also sold to Goody’s, which filed for Chapter 11, but not Mervyns. It is still selling to department stores including Dillard’s and Peebles, as well as specialty retailers such as Charming Shoppes’ Fashion Bug and the Avenue.

“We shipped Boscov’s every month — it is so sad,” said Gorman. “We shipped them on our own for a couple of months and then just had to walk away, unfortunately. We were hit with some overages, but thankfully were able to sell them off.”

Caribbean Joe also was able to handily sell off the “little bit of business — mostly private label — we do with Boscov’s, Goody’s and Mervyns,” said Jamie Salter, ceo of Hilco Consumer Capital and co-chair of Fashionology and Brand Matter, which includes moderate brand Caribbean Joe.

“The good news for us is, if the retailers do get into trouble and we are doing business with them, there’s a good chance we [Hilco] are the liquidator also, so I think I am in better shape than most,” Salter said. “I’ve always worried that the U.S. market was 35 percent over-retailed, so I think retailers going away will make it healthier for other retailers. But it will take time for that to flush through the market.”

As these stores “right size” to fewer doors, volume declines, too — likely by at least 20 percent, based on early announcements of store closures. Much of this reflects the weakness in the mainstream consumer, for whom rising gas and food prices, combined with the mortgage crisis, are hitting the hardest. Although another retailer with a stronger business that targets similar demographics, such as Kohl’s or J.C. Penney, could take over the spaces being vacated by the likes of Goody’s or Mervyns and the relationships with the vendor, business will likely still be lost in the shuffle.

“The consumer is still out there, so the question is, will we get to retain that customer when they realize the store they bought Caribbean Joe at is gone?” Salter said. “Will they look for us at the next store they go to? So now, more than ever, having a brand is really important. It has to be affecting the private label makers more than anything.”

Salter predicts the bankruptcies foreshadow more the shrinking, rather than the eventual demise, of these retailers, and his company is on the prowl to purchase stores while they can’t command a high price. “It’s hard to run a store that once had 200 stores as 50 stores,” he said. “Retail is cheap right now — there are some good deals out there, and we are looking.”

The bankruptcies of these mainstream retailers have turned up the pressure on vendors, causing more to look for investors or acquirers. For example, Not Your Daughter’s Jeans, a $100 million better-priced denim label with solid margins, is said to be close to a deal to sell for upward of $150 million, according to sources. The company denied it was for sale.

“The vendors are going to have a very tough time, and there will definitely be fallout,” said consultant Emanuel Weintraub. “Moderate means a lot of value for not a lot of money, and it becomes a race to the bottom for price. Because that customer is not a Bergdorf Goodman customer, they are the people being pinched. The people who can give the best value at that level are Wal-Mart, Target, Penney’s, Kohl’s, and they have their own extensive sourcing.”

For multibillion-dollar companies, such as Jones and Liz Claiborne, the impact of these bankruptcies is minimal. “We had been managing our credit risk with Mervyns and Boscov’s carefully, so that when these accounts filed bankruptcy, our exposure was immaterial,” said Dave McTague, executive vice president of partnered brands for Liz Claiborne Inc.

Like the larger conglomerates, midsize mainstream vendors are looking for ways to diversify their business in an economy where growing business organically is tough.

“We hold a very strong market share in the moderate area, and that’s a very mature business where it’s difficult to grow because it’s highly penetrated,” Culang said. “Stores are looking for new right now.”

Among some of the latest developments for this sector:

• Hampshire has added better lines, Spring + Mercer in women’s and Joseph Abboud in men’s, to diversify its predominately moderate knit business.

• H.M.S., which has enjoyed double-digit growth this year that will help the better knit firm finish the year with between $130 million and $140 million in wholesale volume, just added cut-and-sew this year and it’s already doing $10 million in wholesale volume. The new, slightly higher-end line Nubby is doing another almost $10 million.

• Rousso Apparel Group has added more casual items and a body-control line.

• Only Nine added wovens, and diversified into juniors and kids’. Moreover, the firm moved the majority of its offshore production back to the U.S. to expedite shipments.

• ICE takes over the Rampage business next year, which Feinstein projects will be a banner year for the company.

“Most stores are planning their business down right now, so it’s very hard to grow existing businesses,” Feinstein said. “But if we have enough aspects to our business, like adding the Rampage line, we will be in a position to take over greater market share when things get better.”

In the meantime, the key is morale. “The retail industry tends to be very reactive, and their moods can be dramatically affected by how bad business was the week before,” Feinstein said. “I go into work every week and I make everyone focus on positive things in the business. I try to get people to focus on the positives and act on the positives, so they build on all the good things in their business.”

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