FACTORS TO STORES: LET’S TALK
Byline: Jennifer L. Brady
NEW YORK — When relationships between retailers and factors go sour, it can reverberate throughout the market, putting merchants as well as vendors in jeopardy.
How those relationships can stay steady and viable, despite the volatility of retailing, was explored last week at a WWD-sponsored Financial Forum, and participants agreed that information and communication are the key.
Factors, a major cog in the financing of merchandise in retailers’ stores, contend that unless the retailer provides timely and complete financial information, the factors cannot provide needed support. Meanwhile, on the retailers’ side of the fence, communication among top retailing executives and high-level factoring officials is seen as a crucial element in developing partnership relationships with vendors.
Also covered was the dilemma of the vendor, trapped between retailers who tend to snip away at the face amount of a receivable and factors who charge back to the vendor any allowances the retailer seeks.
When factors buy receivables, they guarantee payment of the face amount of the invoice only against nonpayment by the retailer. Any special allowances the retailer takes are charged back to the vendor, a source of constant irritation to both the factor and vendor.
Panelists at the luncheon were Lawrence A. Marsiello, president and chief executive officer of The CIT Group/Commercial Services and Michael J. Roche, president of the current asset management group of Heller Financial, representing the factors’ viewpoint; Brian E. Kendrick, vice chairman and chief operating officer of Saks Fifth Avenue, representing the retail point of view; and Arnold L. Cohen, co-chairman of Mahoney Cohen & Co., accountant specializing in apparel firms, speaking for the vendor. (See separate story on Cohen’s position, opposite page)
“I think that realistically speaking the ultimate arrangement between retailers and factors would be clear and timely information and communication both from the retailer to the factor and the factor on behalf of its clients back to the retailer as to what’s happening in the business,” said Heller’s Roche.
Noting that the factor and retailer depend upon each other, Roche said, “The people we represent are a major source of profit for the retailer and without the merchandise in the store, the retailer makes no money.”
He said that the vendors require the services that the factor can provide, whether it’s the lending or credit advice that factors can offer as a “co-mingler of information.”
Retailer Kendrick said he agreed that the information supplied to factors “should be similar to that provided to banks,” but there are times when the size of the vendor doesn’t always justify that much information.
“But, for the most part, we would say we would provide the information equal to that which we provide our financial institutions.”
CIT’s Marsiello noted that equally important as the communication of financials is the strength of the relationship between the factor and retailer. It requires being familiar with the retailer’s management from both a business and strategic point of view, he said. “Time and time again,” he said, “we find that if we have a quality relationship with the retailer, negative developments are more easily handled based upon that spirit of confidence in one another.”
According to Marsiello, the factor should know “what differentiating strategies the retailer has that would make it a success in a consolidating industry and why that strategy is going to translate into future profits.”
“Many times our financial commitments are going six to nine months out into the future,” he said. “And for us to continue to provide the kind of service to our vendors as well as to ensure the retailers that we will be there in good times and not so good times, there has to be a level of confidence between the organizations and the people within those organizations.”
And exactly how can such confident relationships be built?
Kendrick offered, “I think it is important you get on the phone and you call them, you say let’s sit down and you do it at a high-enough level that you have a strategic prospective of the company. That’s worth a thousand pieces of paper with plans on it.
Accountant Cohen agreed. “One of the important things for our manufacturing clients is to see that there is this good relationship between the retailer and the factor.”
One of the reasons a vendor uses a factor, Cohen said, is because he wants to use the credit-checking service that the factor can do much better than the vendor can do for itself. “It isn’t just the credit insurance; it’s that the factor is supposed to have a much better information flow than the ordinary manufacturer does.”
In gathering credit information, Marsiello said, factors in the past would simply look at the retailer’s balance sheet once a year, check the P&L’s and determine if they pay their bills on time. “But today the stakes are much larger,” he said.
“We are very interested in cash flow analysis, margins and predicting where the company will be in three, six, eight, nine months from now if we are to continue to finance a channel of distribution.”
Heller’s Roche noted that the sophistication among factors has increased tremendously so that they have a much bigger interest in the retailers.
“They are not just guaranteeing the credit but also the product lines that they are representing. That makes the communication with retailers important,” he said.
The factors noted that an ongoing problem facing apparel manufacturers is the practice of chargebacks, deductions and unexpected advertising allowances.
Kendrick commented, “Speaking from our point of view, we strive very hard for partnerships with our vendors, and in those partnerships we have once or twice sit-downs with the vendors. They cover an entire range of subjects, what they can do better, what we can do better and so on.
“I think that some people do use chargebacks as a profit center; we don’t. It is counterproductive, it creates paperwork, and it creates a whole nightmare that we have to reconcile. It is not the spirit of the relationship between the retailer and the factor or the retailer and the manufacturer that you expect to have today,” he said.
“There are 15 other things we would rather have from a vendor than chargebacks,” said Kendrick. Among them, he said, are limited distribution, different product mix, a partner in advertising, participation in building vendor shops and providing sales specialists.
“We want a steady partner that walks forward with us in the next several years. I think the dynamics of us really needing to work together are driving us together,” he said.
However, he added, “When I put pressure on the general merchandise manager, they put pressure on the buyer and someone is going to go back to manufacturer and say ‘you have got to help us with this line, you have got to take this back, with markdown money’ or whatever, and that’s retailing.
“What retailers want to prevent,” Kendrick said, “is a magnifying effort of a problem that factors can cause occasionally: a concern that all of a sudden there is a certain laser-like focus [on] a particular retailer that can almost become a self-fulfilling prophecy.” Marsiello pointed out that even in the early Nineties — when bankruptcies and rumors of bankruptcies were rampant — there were cases in which the lines of communication between a retailer and a factor were based on confidence in management despite figures that did not show significant progress.
“We are interested in liquidity; that the company will continue to generate enough liquidity either internally or externally to pay its maturing obligations,” he said.
In addition to speaking with the retailers themselves, Marsiello said factors will turn to the banks for information. If the information is not public, he said factors will examine bank agreements (with the approval of the retailer) and look at the covenants to see if the retailers’ operations may be close to triggering a default.
“There are many retailers that had earnings difficulties, have taken remedial action, maintained liquidity, and changed whatever the problem was, and they have survived in an uninterrupted manner,” Marsiello added.