LOOKING FOR ANOTHER STRONG YEAR
Byline: Thomas J. Ryan
NEW YORK — Mergers, mega-brands, imports and the Internet should continue to dominate the water-cooler talk in 2000, in what has the potential to be another solid year for the apparel industry.
That’s the word from factors, bankers, accountants, Wall Street analysts, lawyers and consultants serving the apparel market, who generally see the resilient economy leading to an encore of the mostly strong apparel sales trends seen this year. The economy is likely to slow, but only modestly, the money crowd predicts.
Most foresee an acceleration of mergers among wholesalers as publicly held firms hunt down new growth vehicles and smaller-to-medium-sized ones face difficulties meeting the demands of retailers. Indeed, many believe consolidation among American vendors has been snail-like compared with the spate of mergers this year among Europe’s luxury giants as well as the pace in other industries, including banking and factoring.
Brands, particularly lifestyle-oriented labels pioneered by Ralph Lauren, but recently successfully replicated by chains like Abercrombie & Fitch and Old Navy, will continue to be strong, and licensing deals will be hotly pursued.
On the downside, retailers will still vex wholesalers with demands for later shipments, lower prices and chargebacks. Keeping inventories lean will be the key to success for both retailers and vendors, observers said. Imports will loom even larger, particularly with China’s entry into the World Trade Organization. That spells more misery for domestic manufacturers and converters.
The Internet should continue to build in strength, not only for e-commerce, but in improving efficiencies throughout the supply chain. Some even see e-commerce players acquiring brick-and-mortar stores.
Money should be available, although a likely hike in interest rates could pull credit in slightly. Despite consolidation among lenders — including Fleet Bank’s merger this year with BankBoston and CIT Commercial Services’ acquisition of Heller Commercial and Congress Talcott — competition is fierce enough to provide ample funding options.
Retail bankruptcies should remain fairly scarce, but intense competition, including the arrival of e-commerce shopping, will lead to some fallout. Even with a light bankruptcy load this year, the filing of Loehmann’s and Filene’s Basement, the liquidation of Caldor, Uptons and T. Eaton, and the sale of Mercantile Stores to Dillard’s put a crimp in many a vendors’ businesses.
Overall, though, the setting is promising for in 2000. Although Y2K fears might hamper its start and the economy may slow slightly, low unemployment and rising wages in the U.S., improvement in Asia and Mexico, and euphoria over an election year should bolster consumer spending.
Here’s a summary of views from financial executives.
Arnold Cohen, co-chairman of Mahoney Cohen & Co., an accounting firm: “There definitely is going to be consolidation, particularly by the publicly held megabrand players. Their core businesses are going to slow down, but they need to constantly grow in order to give shareholders increasing value. Liz Claiborne, Jones Apparel and Polo Ralph Lauren have all made acquisitions this year, and Hilfiger, Kellwood, Leslie Fay and Nautica are talking about it. I think people are going to look for size in anticipation of being a survivor or selling themselves. I don’t think anyone has a prescribed notion of going public — the bloom is off that rose. I think people are going to be strategically setting themselves up to sell themselves. Startups are just nonexistent, which is sad because that’s what made this industry. But I think we’re going to have a terrific yearend, and there’s a lot of excitement that should follow through to 2000. It’s also an election year, so everybody is going to have a positive outlook, and consumer confidence should be good. Our ready-to-wear clients are doing well. For a change, I’m bullish.”
Anthony Scarpa, first vice president of Chase Manhattan Bank: “The trends we’ve been seeing in the apparel industry over the last couple of years have accelerated this year, and 2000 will see a continuation. Brand equity will be very important. The power of those brands will continue to provide differentiation, consumer recognition, credibility and a better margin. Consolidation will continue both at the retail and manufacturing level. You will see the major apparel companies continuing to acquire niche brands, and I would not be surprised if we do not see major combinations. The challenge will be how these companies utilize e-commerce as an added channel of distribution and for business-to-business communications. I would not rule out continued consolidation in the financial services business, but I think none of that will have an impact on financing the apparel industry.”
Andrew W. Tananbaum, president of Century Business Credit, a factor: “Our clients are reasonably bullish for spring. I think apparel will continue to grow at historic rates, but the big question is what will be the leading categories. Branded women’s sportswear should be very strong, and young men’s streetwear brands should continue strong. There should be continuing growth in imports, but I see production shifting more to South America and Mexico. Credit should be available for the apparel industry, but if there is a slowdown, we could see a backing up in credit availability. Institutions go hot and cold with regard to financing our industry; it goes in cycles, but right now, it’s a good cycle.”
Peter J. Solomon, head of the investment banking firm Peter J. Solomon & Co.: “The economy is strong and should keep holding on in 2000. We should see mergers, but what really affects my business is the fact the neither retailers nor apparel manufacturers are particularly aggressive in terms of acquisitions, certainly in larger acquisitions. It certainly pales to what’s going on in other industries. If you didn’t have LVMH and Pinault-Printemps, what would you have? We don’t have too many consolidators in this industry. At retail, we’ve seen some big acquisitions among supermarkets, but no large numbers in soft goods. I do expect over a period of time more mergers between e-commerce providers and brick-and-mortar stores. Apparel stocks might get off their rears in 2000.”
Walter Kaye, president of Merchant Factors, a refactor: “I feel that 2000 is not going to be as good as 1999. People are not making any commitments until they see how this [Y2K] situation pans out, and a lot are becoming paranoid. The first quarter will be very soft with some pickup in the second quarter, as people get acclimated with the year 2000. And of course, everything is relative to the overinflated stock market. China being admitted into the World Trade Organization is going to spring loose a lot of opportunities for importing, and that’s going to devastate the domestic production business. Our apparel-textiles business will turn into a presold finished-garment type of business. More and more, people will turn to importers because they have to bring in goods at a cheaper price in order to be competitive.”
Mark Beinstock, executive vice president at DCD Capital, a refactor: “We are cautiously optimistic about prospects for 2000. The only cloud we see is the potential for an interest rate spike, which would obviously have a major impact on the stock market and consumer confidence. We see a continued focus on imports. Even those who use domestic importers are going directly to India, Pakistan and China to get goods.”
Saul G. Berkowitz, managing director of the Textile and Apparel Group at American Express Tax and Business Services: “It certainly would appear from all economic indicators that the economy will continue to be good in 2000. Unemployment is down, and spendable consumer dollars are up. We’ll find retail sales for the holiday season will be very good, and that will translate into Christmas bonuses for workers at those companies. That will put spending money in the pockets of consumers. I still think the non-megabrand, smaller suppliers are going to have to look for strategic partnerships in order to survive and prosper in the long term. Sometimes, growth has to come from changes in equity ownership. Apparel makers have to understand that they’re not immune to what’s going on in the rest of the world.”
Andrew Jassin, partner of Jassin-O’Rourke, a consulting firm: “We’re convinced that the year 2000 is going to bring an increase in manufacturing consolidation. There are more pressures on manufacturers than ever before, and for those who are marginally profitable, time is catching up. Because of the pressure by retailers for margin enhancement and floor-ready goods and such, many manufacturers are going to be forced to find strategic partners. We see producers merging with designers and marketers and vice versa in an all-out move to become vertical. We also expect to see early in the next decade a return to developing brands that come to market ’cause we’re running out of designer names. Our industry used to invest in young talent, kind of like a farm league, but there’s less and less of that today. At the same time, it’s less expensive to start a brand than to create a designer.”
Lester Lazarus, chairman of Lazarus & Lazarus, a law firm: “The apparel-textile area will shrink more as mills are going to either cease doing business or reduce their volume. I see a lot more imports. Everybody’s an importer today. The ones who benefit are consumers and retailers in lower prices. I don’t think you’re going to find any major bankruptcies because the retail sector has weeded out most of what was problematic. That’s generally good for vendors, but retailers still rule the world. They buy what they want and dictate their own prices, and the rest just get in line.”
Stanley Officina, president of Sterling Factors: “The soft-goods market is showing signs of recovery. My feeling is that we’ve gone through a very hellish 18 months, with crises in Japan and Korea, civil unrest in Indonesia, financial problems in Mexico and with NAFTA. All this impacted the free flow of merchandise and ultimately the earnings of manufacturers and importers. But these things seem to be working themselves out now. Retailers continue to put increasing demands on wholesalers, and that won’t change. Credit should be readily available because there’s still a lot of competition, but I see that related to service more than price. I’m very optimistic about 2000.”
Steven L. Marotta, equity analyst at Wasserstein Perella Securities: “Companies that deliver the right product on time and don’t overinventory will succeed. The big problem in this industry is that apparel makers are lulled into complacency when a good year in one season leads to product sameness and overpurchasing the next. But I think the sins of the past will not be repeated. We’re working on substantially shorter lead times as vendors take advantage of EDI and computers and push costs back on sourcing agents. It’s sometimes a painful transition for a vendor, but it promotes more timely delivery of fashion product, which is what this industry needs to thrive.”
Jack McClaughlin, senior vice president at Westgate Financial, a refactor: “We’re looking for continued growth, albeit maybe more moderate. Some of our domestic operators are doing really well, but they are also looking to increase imports. But a lot of little guys couldn’t make it after they lost one or two accounts.”
Donald B. Relkin, attorney at Duane, Morris & Heckscher: “I think 2000 will run similar to 1999. Companies will be liquidated by being merged into other companies or close in a quiet fashion. It’s just a bigger game, and the smaller operator can’t deal with the size of the retailer that can dictate all kinds of conditions. Only the innovative entrepreneur with a niche customer and a niche product will make money. But you can’t really stay small too long. It’s a tough existence.”
David Millberg, vice president of Millberg Factors: “We’re guardedly optimistic about the beginning of 2000. It’s very competitive, but overall retail sales remain pretty good. But it’s still a very difficult environment, as our clients have to fight for every dollar and still have to be vigilant about chargebacks. Those wholesalers who are successful have a niche and serve that niche very well. Sometimes it’s just the ability to source product well and deliver them quickly, and having a name is very helpful. You put a name on the same product and all of a sudden you increase its value.”
Harold Dundish, senior vice president of Finova Capital: “We’re looking for a good holiday, and that bodes well for spring business. My only concern is the volatility in the stock market the last couple of weeks. But if the stock market stays strong, we should do well. Retail bankruptcies seem to be fairly stable. We all know of problems out there, so there should be few surprises. The pressure is still on our apparel clients, as the stores will pull the same tricks after the holiday season with chargebacks, allowances and asking for discounts. The stores are unmerciful.”
Paul Buxbaum, president of Buxbaum Group, which specializes in turnarounds, liquidations and asset evaluations: Money will be available, but with the interest rates inching up, banks might not want as high a leverage ratio as they have in the last year-and-a-half.”