FACTORS’ NEW CONCERN: THE STRUGGLING VENDORS
Byline: Thomas J. Ryan
NEW YORK — Factors used to worry most about which retailer was going bankrupt, but they now seem more concerned about the persistent struggles of their vendor clients.
While bad debt losses from retailers are becoming rarer, credit losses by vendors going under are increasingly popping up because of unceasing margin pressures from retailers.
And with the lack of start-ups and mergers among vendors, some factors are struggling to lift apparel factoring volume from their established clients.
Still, first-half volume gains are not scarce, but they’re often coming from businesses other than apparel or from stealing a competitor’s clients.
Some factors lamented that the robust gains at retail so far this year haven’t translated into similar jumps in revenues for many of their vendors and, consequently, in higher factoring volume, with most noting that most existing clients saw flat or only slightly higher sales.
“The first half for retail sales was fantastic, but a lot of that is not flowing through to factoring volume,” said Stuart Brister, head of factoring at Bank of America Commercial, formerly NationsBanc Commercial.
While a few suspect that some of the shortfall reflects strength at retail of private label, many believe apparel in some key areas is a tough sell, pointing to the problems some big basics manufacturers are having.
“New business activity [in apparel] has been very spotty, and in spite of what’s supposed to be a robust economy, we’re not seeing supporting numbers in terms of growth in sales by our existing clients,” said John W. Kiefer, president of Capital Factors, Boca Raton, Fla. “Even some of the bigger non-factored apparel players, such as VF Corp. and Levi’s, are having their difficulties.”
Moreover, many vendors are still having problems handling demands from retailers, particularly for guaranteed initial margins, end-of-season markdowns and delivery terms. “While retail sales are strong, I think the markdowns are being maintained at the expense of the vendor,” said Stanley Officina, president at Sterling Factors.
Michael Stanley, executive vice president at Rosenthal & Rosenthal, said that given these pressures, vendors are turning to factors to cut costs, further narrowing factors’ margins.
“There’s pressures on the vendor’s margins, and hence there’s pressure on borrowing rates and factoring commissions,” Stanley said.
Nonetheless, most factors generated positive first-half factoring volume, with several noting a nice pickup over 1998 trends. Some admitted they took advantage of the shifting scene among factors themselves, including the sale of Congress Talcott to CIT Group/ Commercial Services in March and General Motors Acceptance Corp. (GMAC)’s acquisition of BNY Financial in June. There are also widespread rumors that Heller Commercial Services, the factoring arm of Heller Financial, is on the selling block.
But many also said they benefited from new business activity, strength in areas outside apparel and textiles and even the occasional pocket of strength in apparel. Most were optimistic about retail sales in the second half.
“If August is any trend as it relates to the second half, it should be a strong year,” said Brister. “As long as the consumer keeps on spending, the economy keeps ticking along and there’s no rapid increase in interest rates, retail will do fine.”
For factors, low rates continue to be a problem because of intense competition.
“Every deal, you have two, three or four factors looking at it because everyone has such aggressive new business goals. The bottom line is not as attractive,” said Harold Dundish, senior vice president at Finova Capital.
Said Tim Woodall, senior vice president and division manager of factoring at Atlanta-based SunTrust Bank, “Everybody’s chasing the same opportunities, and the larger the volume, the more players there are.”
John Heffer, president at Republic Business Credit, said vendor mergers generally “are not that good for factoring,” with many acquirers being large capitalized firms that don’t use factoring because they have their own credit departments. Also, several larger firms don’t use a factor or a bank for borrowing needs.
Heffer said the movement toward large apparel firms also tends to reduce start-ups, and start-ups historically have been good for fostering more factoring business.
Kiefer concurred: “Los Angeles used to spawn hundreds of startups a year, but we’re not seeing that anymore. It’s very hard for small apparel companies to gain a foothold because so much of the distribution is through the very large retailer, either the discounters or department stores, and the small start-up can’t produce the kind of quantities to get into that kind of arena. There’s not enough mom-and-pops to support start-ups.”
The saving grace for factors are that credit losses are minimal, with the Chapter 11 bankruptcy filings of Loehmann’s and Filene’s Basement largely expected and avoided by most. The wave of consolidations has weeded out many marginal players, factors said.
Heffer noted that the consolidation at retail has allowed the credit community to get “much better cooperation and information” from the majority of retailers.
“We have a much better relationship with retailers where we can work with them, particularly in a period when numbers are disappointing, and see them through the lulls,” Heffer said.
The downside is that the consolidation has exposed factors to much larger credit risks should one of the major chains go bust. “We have much lower bad debt, but when you do have a bad debt, it’s a big one,” Kiefer said.
CIT took some hits in the filings by Loehmann’s and Filene’s Basement, but John F. Daly, executive vice president at CIT, said it’s part of a factor’s life.
“Loehmann’s and Filene’s Basement were tough, but we stayed in both of those credits because we wanted to continue to provide service to our clients,” Daly said. “We came down a lot slower than others. If we run away from every marginal retailer, where are we?”
Daly said generally, business has been good, with “significant” increases in volume in the half, part through the Congress’s acquisition, but also solid internal growth.
“The Congress addition has worked very, very well, and we are also experiencing gains through new business signings, growth in our existing portfolio and client retention,” Daly said. “Branded guys are doing real well, and highly efficient private label makers are doing real well, but the moderate guys are finding it tough. I expect about the same in the second half.”
Brister said Bank of America’s factoring volume rose 9 percent as a result of movements into new areas such as technology and service industries, as well as some gains in the apparel/textile group. He also said the merger of NationsBanc with Bank of America last year has allowed the firm to offer factoring services across the country.
Kiefer said Capital’s factoring volume was up 5 percent in the half.
Andrew W. Tananbaum, president of Century Business Credit, said first-half volume “was up, but not substantially,” because the company was transitioning through its merger with Wells Fargo. Tananbaum said the merger has given Century, which specializes in importers, a solid presence on the West Coast.
“We are anticipating good volume increases for the second half as a result of numerous new clients that we signed up in the first half that are really not coming on board until then,” said Tananbaum. “As long as the economy stays strong, it should be good for retail and apparel.”
Republic’s Heffer said volume was up and cash flow was up, though bad debts rose as well.
“We’ve see the second half as looking pretty good, and we haven’t seen anything on the horizon which would cause us to be concerned,” said Heffer. “There are some areas, such as dresses, that are not enjoying a banner year, but others are booming. Given all their gross margin pressures, our apparel clients are doing fine.”
Finova, which went through restructuring last year, said its first half “was as good as all of last year,” reflecting a more aggressive stance in the market. Dundish said some vendors like working with a smaller factor.
“Some vendors don’t like to just be treated like a number and like the more personalized service a smaller factor can offer. They want to be a big fish in a small pond instead of small fish in a big pond,” Dundish said.
Steve Sargent, president of GE Capital First Factors, said General Electric’s entry into U.S. factoring with last year’s acquisition of First Factors is going well, with business in Hong Kong and Los Angeles booming.
“The whole concept of leveraging the excellent client service of First Factors with the stability that GE brings is really appealing to the market. It certainly is resulting in excellent new business volumes in the first six months. We’ve done more business than the previous year.”
Officina said Sterling’s volume is “a little ahead” of the prior year.
“The gains continue to be driven by new business coming online, and we are seeing a number of accounts that have never factored previously that are now looking to factoring. Retail looks fairly strong going into the fall season, but we’re still concerned if our clients are maintaining sales and profit.”
Stanley said Rosenthal’s volume, as expected, was flat, which he attributed to the continuing shift in retailers taking in goods closer to the selling season.
“We have a mixed portfolio, and we have some people in the apparel group that are doing extraordinarily well, but generally, the retailers are having it easier and using their muscle to take advantage of their vendors. But as a result of strong new business activity, we expect second-half volume to outpace last year,” Stanley said.
Leonard Milberg, chairman at Millberg Factors, said his firm’s business was up “around 10 percent.”
“We’re getting some new business and some clients are doing a little better. I think in general, the economy seems to be picking up a little,” he said.
SunTrust’s Woodall said volume moved up with a double-digit gain on strength across the board. “Apparel is not the shining star of our group, but it’s holding its own,” Woodall said. “Overall, we have no reason to believe that the second half isn’t going to be as good as the first half.”