By and  on January 2, 2002

IT MAY NOT HAPPEN IN THE FIRST HALF, BUT AN ECONOMIC RECOVERY IS IN THE WORKS.

Along with the rest of the country, California slipped into a recession in the third quarter, as tourism plunged following Sept. 11.

The state's industries also have struggled this year with rising energy costs and a minimum wage that's 23 percent higher than the federal standard. But the Golden State's recession is "a mild one," according to Jack Kyser, chief economist with the Los Angeles Development Corp. Kyser predicted that the dual powerhouses of defense spending and Hollywood will spark a gradual recovery in the middle of 2002. Century City, Calif.-based aviation contractor Northrup Grumman, for example, recently announced plans to hire 1,200 people as part of the $80 billion joint strike fighter program with Lockheed Martin. In addition, Hollywood is coming off a record-breaking $8.3 billion in domestic box office revenues this year, Kyser pointed out.

While the overall picture for California is relatively healthy, Kyser acknowledged that retailers have a tough road ahead. The state, which has seen a retail building boom in the past four years, is now saturated, he said. He predicted a wave of Chapter 11 filings in the first half of the year, as retailers take a hard look at their market niche and restructure with fewer locations. As for manufacturers, they need to be attuned to the consumer's mood, Kyser said. "If the values of practicality, family and home continue for a while, it will have major ramifications, especially on upper-end goods," he said.

The following is a look at what the first half holds for vendors and retailers.

The Vendors

With a tough first half ahead, vendors are going lean and mean.

Most are not anticipating a quick fix, said Rob Greenspan, managing partner of Moss Adams, an accounting firm with 300 apparel industry clients. Vendors' sales volumes have dropped 10 to 15 percent this year, he estimated.

"They're projecting to adjust overhead costs and inventory levels so they can survive and make money," he said. "But they're not looking for any big years."Manufacturers are scrutinizing every expense, from sample costs to payroll.

Several prominent manufacturers -- including Guess Inc., BCBG, Tarrant Apparel Group and Lucky Brand -- have trimmed staff in recent months.

Although Novato, Calif.-based Blanc Noir has not had to cut its payroll, president F.G. Gozashti said he's "never experienced a situation like this -- where they're killing you on price and then literally waiting until the last possible second" to place an order.

Gozashti believes more midsized companies, particularly importers, should outsource distribution, rather than carry mortgages on warehouses and pay shipping workers.

"L.A. has always been a key area as a distribution center," he said "It's a port close to the Orient. You're only on water for 14 to 16 days, and you're still capable of making deliveries."

He also recommended vendors pull out of oversaturated categories like graphic T-shirts that have become "markdown nightmares."

Denim has remained strong, much to the relief of many local companies that have banked heavily on it. Business is "great" at denim maker Koos Manufacturing, which produces A.G. by Adriano Goldschmeid, as well as programs for major retailers like Gap, according to vice president Jeff Rudes. But the South Gate, Calif.-based company has recently taken a more conservative approach toward fabric. "Instead of bringing in a million yards of fabric for a client and being ahead, now we're calling for our fabric just before our customer needs it," said Rudes.

But despite less-than-ideal market conditions, there are new players plunging into the fray. Urban lifestyle brand Hot Child made its debut at the November market, backed by $40 million private label producer Forte Gear. Co-founder Lloyd Parks said he and partner Jess Kim are positioning the company as a volume player, with sourcing in Mexico, Guatemala and overseas. And to supplement the $400,000 in branded orders they received at market, Hot Child is taking on private label work, Parks said.

According to Greenspan at Moss Adams, that's a common way of supplementing volume in cash-crunched times. However, Greenspan cautioned, vendors shouldn't "chase cheap business. Lots of people chase volume at any price, and it never seems to work out." Where will vendors see relief? Ron Mata, vice president of sales and marketing for Alhambra, Calif.-based importer Merries International, said he's anticipating a nice revenue jump following China's entry into the World Trade Organization this November. Quota on imports from China will be eliminated by the year 2005. "Shanghai all of a sudden has emerged as a strong commercial entity surpassing Hong Kong," Mata said. "We will be at an advantage due to the fact that we've already set up offices in China."The Retailers

Nearly every major retailer in California cited significant sales drops post-Sept. 11, and analysts warn that recovery will be gradual -- not overnight.

Doug Smith, managing partner at Los Angeles accounting firm Smith, Mandel & Associates, said retailers will likely spend the first quarter trying to "blow out what's remaining in inventory. If that's successful, we may see a rebound in second and third quarters."

San Francisco-based Gap stores said sales at stores nationwide that were open at least a year plunged 25 percent in November from the same time a year ago -- the steepest drop yet during the retailer's 19-month consecutive slide. The miserable start to the holiday shopping season prompted Gap to warn that its fourth-quarter loss will be "considerably worse" than its third-quarter loss of $48 million, or 6 cents per share, excluding tax charges.

Fresno, Calif.-based Gottschalks posted a third-quarter loss of $2.6 million, compared with an income of $371,000 in the same quarter a year ago.

Bebe Stores is also shaving costs wherever possible. "After Sept. 11, we went through every single person, expense and department and realized there were overlapping design duties," said Christina Perozzi, vice president of finance at the Brisbane, Calif.-based retailer. Bebe ended up laying off five employees and consolidating 20 positions.

According to Perozzi, the corporation will focus on a buying plan that improves inventory turn and reserves dollars for last-minute trends. She said casual categories will remain strong and that accessories will continue to drive sales. Dresses are the weakest category.

Bucking the anti-dress trend, however, is Windsor, a Los Angeles-based retail chain specializing in dresses, eveningwear and prom. The category "has really thrived," said vice president Ike Zekaria. He said retailers like Windsor that serve specific niches appear to be weathering the storm. However, the retailer has lowered price points and is focusing on core items, such as woven tops and denim, to carry the company until prom season returns. "I don't think we've necessarily hit the bottom yet," he said. "We still plan to open stores in 2002, but we'll be a bit more selective." Currently, Windsor plans to open three stores in the Midwest.

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