A growing U.S. economy helps well-run companies that need access to credit financing.

Holding steady.

That’s generally the conclusion among lenders who finance retail, fashion and beauty firms. With an economy that seems to be humming along, they said there’s no immediate cause for concern. And that bodes well for the better-run retailers and vendors in need of financing.

Consumer confidence remains high. The Conference Board’s Consumer Confidence Index rose to 127.4 in July, representing one of the highest readings in 18 years. And positive reports from many retailers on first- and second-quarter earnings suggest that perhaps the worst could be over after a few years of navigating the consumer shift to online shopping.

David Shiffman, cohead of the retail group at investment banking firm PJ Solomon, said the move-up in stock prices for many retail companies over the past year suggests that investors have faith that retailers now know how to operate either in an environment where much of the sales base has shifted from brick-and-mortar to online or an operating climate where consumers are spending less on goods so they can spend more on experiences.

Shiffman said healthy companies who need financing through the asset-based lending model should be fine, since the inventory serves as collateral backing the loan. That’s not the case for pressured firms considered to be part of the distressed arena. Another area for financing is the mergers and acquisitions front. “This is on a case-by-case basis. The surviving retailers…tend to be larger, better capitalized and have a stronger balance sheet. That makes them better acquirers, and they are able to attract the capital needed in order to finance those deals.”

Joe Stein, a managing director at PJ Solomon who leads the company’s financing advisory efforts, added, “The bigger, global sector leaders are still able to tap the capital markets pretty freely and regularly.”

Stein pointed to Costco Corp., TJX Cos. Inc. and BJ’s Wholesale, which just completed its initial public offering, as examples of well-run retailers. Because of their relevance to consumers, “they can go out and raise debt capital pretty efficiently.” However, midsize retailers face more headwinds, either because there are too many competitors or because they have primarily a regional presence. These are the ones that could find themselves on the receiving end of cautiousness on the part of some lending sources, he said.

“In general, the credit markets are quite strong across all sectors,” Stein concluded.

Richard Kestenbaum, partner at the investment banking firm Triangle Capital LLC, said lenders have been “pretty aggressive” when it comes to financing for transactions on the M&A front. “Yes, there’s political instability, but people are paying less and less attention to it. Most important has been the confidence factor. People are feeling expansive. Lenders and acquirers are willing to take on additional risk at higher valuations.”

The investment banker said valuations range from sector to sector, and from company to company, but that “in general, valuations are higher now than they were 24 months ago.”

Kestenbaum believes that there’s enough fuel in the tank to continue along throughout 2019. “For me, the question is 2020, because at that point the length of time that this high-value cycle will have run will have been very long. Plus it’s an election year, and that always creates a level of uncertainty. Already we’ve seen that the economy has remained steady even when the politics are crazy. Barring some unforeseen event — and I see nothing on the horizon right now – if everything stays the same, then 2019 looks good,” he said.

Many companies also are expanding in one way or another.

On the retail front, so far there are 2,846 doors slated to open in the apparel, accessories and beauty categories. Nordstrom opened its first New York store and men’s site in Manhattan in January, with plans to open a women’s store in fall 2019. It is also opening four more Nordstrom Rack stores this year and four more in 2019. Specialty retailers such as Abercrombie & Fitch and American Eagle Outfitters Inc. are both opening stores this year. Discounters such as Dollar General Corp. said it will open 900 stores, while its competitor Dollar Tree Inc. plans to open 650 stores. TJX Cos., the fashion and home off-price retailer, said it plans to open 238 sites.

Even store openings by smaller brands indicate a level of retail optimism. Rebag, the purveyor of luxury handbags in the resale market in April opened a second Manhattan location at the corner of 57th Street and Madison Avenue. More recently, the socially conscious men’s brand Apolis opened its flagship at 243 Centre Street, representing the brand’s first East Coast unit. And BCBGMaxAzria, under new ownership via Marquee Brands, earlier this month added to its store count through a new store at 77 Mercer Street in SoHo. The space totals 5,200 square feet and features the brand’s updated modern store concept and layout. Looking ahead, skin-care brand Face Haus has selected Hanley New York as the location for its first Manhattan store. Assisted by RKF, which arranged the lease, the brand will occupy 1,520 square feet of space on the ground floor at 1140 Third Avenue at 66th Street. According to RKF broker David Abrams, the store is expected to open in early 2019.


The BCBG Max Azria storefront at 77 Mercer Street in New York.  Courtesy Photo


Brands also have been adding to their core repertoire, looking for ways to strategically expand for growth.  Footwear brand Stuart Weitzman has added evening bags to its merchandise offerings, while Michael Kors Holdings Inc. has been growing its men’s business. And VF Corp., at one point the original owner of intimates brand Vanity Fair, lately has been making a greater push into the workwear sector, while still focusing on growing its core outdoor sports categories.

Gary Wassner, chief executive officer at Hilldun Corp., a factoring firm, said many of his clients are taking a closer look at what are the appropriate categories for their brand, as well as which ones are considered profitable extensions. “Many luxury designers of contemporary brands are looking into home now. People aren’t jumping into categories like costume jewelry or fashion jewelry. They are looking at organic expansion. The consumer today is a lifestyle purchaser. They are not buying a one-off purchase of sportswear. They’re looking at enhancing their lives, not just what they are putting on their backs,” he said.

Wassner said the lending environment is good for the next six months, noting that the long lead times for October and November deliveries for holiday has meant that orders now being put into production had to be confirmed in April.

What worries him is the “chaos in Washington.” There’s been the battle of words between the governments of the U.S. and China in the nascent trade war. That includes the threat that U.S. President Donald Trump would actually put into effect on Aug. 30 an additional tariff on $200 billion worth of goods. That would mean an additional 10 percent tariff on items such as handbags and accessories, which already are highly taxed. And last week also saw former Trump campaign chairman Paul Manafort and former Trump attorney Michael Cohen each become convicted felons.

“All this is embarrassing and destabilizing. Nobody likes to shop in a destabilized environment. If things continue to deteriorate, you have to wonder what it will mean for the midterm elections, the possibility of an impeachment and what the effect will be on the consumer psyche,” Wassner said.

J. Michael Stanley, managing director at Rosenthal & Rosenthal Inc., who heads up its factoring division, said, “What concerns me is something that would be disruptive and require a long and synchronized recovery. That could be the impact from additional tariffs, or something else.”

The reason he’s concerned about tariffs is because some clients are in sectors such as accessories where margins are typically low, around 20 percent. That’s compared with beauty where margins are far higher, typically around 50 percent or greater. “An additional 10 percent tariff is going to hurt my accessories clients,” he said.

As for right now, things seem to be humming along. “We’re encouraged by the recent performance by the retailers.…Overall, the consumer remains the engine for growth. We have a healthy consumer, unemployment is down, interest rates — even if they creep up — are still at historical lows, and consumer sentiment is reasonably strong. We feel we’re in a positive place overall,” the factor said.

Rosenthal factors across sectors from fashion to beauty, footwear, home and electronics. He’s constantly reviewing clients’ brands and their current relevancy in the marketplace. According to Stanley, the credit markets and lending environment are “still good. For a company going through some disruption or trauma, it’s another story. If it’s a solid and well capitalized company, they will find that the credit markets are really strong and that they can easily get financing.”

Adam Winters, ceo of Merchant Financial Group, agreed that the burden of higher tariffs is a concern over the short term. He explained that brands might not be able to offset the extra cost because “retailers don’t want to hear about price increases. Moreover, many wholesale vendors didn’t start soon enough to find alternative manufacturing options. “It takes time. You can’t find a place and then just snap your fingers and be up and running. It takes years to build up the factories,” the financier said.

Winters also was positive about the current lending environment, noting that the fundamentals of many retailers seem to be improving. One area that he’s noticed has been on the rise is the increase in the number of factories that now require a deposit — on average, the ask is 30 percent — when orders are placed. For the longest time, importers — those who bring goods into the U.S. — have used letters of credit. That’s essentially a promise to pay, with actual payment owed when the goods arrive in the U.S. and the L/C is presented for payment. Under the old procedure, the L/C obligation is considered a contingency because if orders are canceled or they never arrive, there’s no loss of payment. Winters said the new factory requests for a deposit ties up his clients’ cash for 120 days. Lenders now need to take into account the over-advances when they consider the availability of a credit line, and clients need to know the factories they are working with because an upfront payment could result in a loss of funds should the plant end up bankrupt, Winters said.

For now, real gross domestic product in the U.S. rose at a 4.1 percent annual rate in the second quarter, up from a 2.2 percent pace in the first quarter. IHS Markit’s chief economist Nariman Behravesh, in a report cowritten with Sara Johnson, wrote that “Financial conditions remain supportive of growth, despite escalating trade tensions between the United States and China.” They are projecting real GDP to grow 2.9 percent for 2018, and 2.7 percent in 2019.

An economic report from Wells Fargo Securities from Aug. 8 concluded that “income growth [in the U.S.] has been much stronger over the past few years, which means the expansion has much more fuel in the tank than previously thought.” It also noted strong momentum going into the second half, although that was attributable in part to efforts to produce and ship goods ahead of anticipated retaliatory efforts. While the inventory drawdown may have pulled production forward and left inventories lean in the supply chain, the expectation is that a rebuilding of inventories “should keep output humming at around a 3 percent pace for the next two quarters.” The Wells Fargo report also noted that global economic growth also remains solid. “Looking forward, we forecast that the global economic expansion will remain intact through at least the end of 2019,” the report concluded.

Eric Fisch, head of retail and apparel for the commercial banking division of HSBC, hasn’t seen any issues on the lending side. He noted that there has been growth in new loan activity. “A lot of that growth is coming from direct-to-consumer brands, which are growing rapidly and looking to borrow for working capital purposes,” he said.

Fisch said most of these companies have already tapped the equity financing market via private equity or venture capital investments and are at that point in their growth cycle where the business can support a revolving line of credit.

“All the deals are getting done,” Fisch said. For these firms, which are handling smaller manufacturing orders and placing them closer to production time, the banker said he’s looking at business projections and lending against them. “Most of these firms know [from last year’s sales] that if they had more stockkeeping units or deeper inventory, they would have hit certain numbers. We’re also looking at their social media spend, and extrapolating our projections off of that data to help them [produce more inventory] to field that growth,” Fisch said.


Lenders are also seeing growth in their direct-to-consumer business loan portfolio.  Shutterstock / Garry L.


One commercial lender at a financial services firm that provides financing to a wide range of industries, and who requested anonymity, said the credit markets are “robust.…What I’ve seen more recently is that banks are more aggressive in their willingness to lend to [companies in] the retail sector. Banks are lending on an asset-based basis.”  This individual said past losses on loans in the retail sector have been in the high-yield bond market and the leveraged loan market. He noted that since banks get the first-lien priority, “it’s not like they’ve actually lost money in retail.”

Because there’s pressure on the banks to put money to work, plus the recent stability on the retail front, this financier said he expects medium-size banks to try to gain market share in the retail space.

As for potential hiccups on the horizon, this person’s concern is the all-important, holiday-selling season, noting that if the selling season is off, then there could be some lending issues next spring. He doesn’t expect major problems over the tariff issue on a longer-term basis.

“My own personal view is that the economies of the U.S. and China are way too intertwined.…There is saber rattling from both sides. They will work it out [because] China buys our Treasuries (U.S. government debt obligations) and we buy their goods,” he said.


A Wells Fargo report said global economic expansion could continue through 2019.  Shutterstock / Phongphan