APPAREL GAINS GIVE FACTORS A LIFT
Byline: Sidney Rutberg
NEW YORK — A pickup in the apparel business in the second half of 1996 and a slowdown in bankruptcies led to a record year for the factoring industry.
Volume was up 4.7 percent to $63.8 billion, and credit losses were relatively moderate, so profits were strong and are expected to continue being upbeat through 1997.
Factoring executives are not expecting a rash of retail bankruptcies this year, but there are a few large retailers that they are watching carefully. Although none of the executives would go on the record mentioning names, the names being bandied about behind the scenes are Venture Stores and Montgomery Ward. Kmart Corp., which was much on the minds of the factors in 1995, has received a major injection of operating capital and appears to be on the mend.
Referring to credit losses, Michael J. Roche, president of Heller Financial’s factoring operation, said they were controlled well last year, and for 1997, the trouble spots have been identified and the risks are being well managed.
While some factoring executives were less sanguine, others echoed Roche’s view on the bankruptcy outlook.
Joseph A. Grimaldi, president of BNY Financial Corp., the second-largest factor in the country, said credit losses were low in 1996, and 1997 should also be a good year. “We’re watching our credits very closely and don’t expect many insolvencies this year.”
Jerry Sandak, executive vice president of Rosenthal & Rosenthal, also noted that his firm has “pretty much identified the companies that are in trouble, and [we] are watching them very carefully to control our exposures.”
However, Jerome M. Kenyon, president of Congress-Talcott Corp., sees it a little differently. He said his firm has “a list of about five candidates for Chapter 11 this year.” He said, “We’re watching them carefully, hoping they won’t go, but I’ll be surprised if they don’t.”
Stanley Officina, president of Sterling Factors, a small but fast-growing factor, also sees credit losses ahead.
“It was a pretty quiet year for credit losses in 1996, but looking into 1997, I don’t see the quietude continuing,” Officina warned. “There are some pretty big credit problems out there waiting to happen.”
As for 1996, Officina said, “We had a nice influx of new business along with strong growth by our existing clients. Women’s sportswear vendors did particularly well with denims and sweaters.”
At Century Business Credit Corp. it was more of the same — strong volume and low credit losses. David Finkelstein, senior executive vice president of Century, was a little disappointed with a volume gain of 16.4 percent.
“The way the year started out, I expected an even greater volume gain. But it was still our most successful year ever,” he said.
Only two factors in the group showed a decline in volume last year. Congress-Talcott was down 5.9 percent, and Atlanta-based NationsBanc Commercial was off 1.6 percent.
Congress’s Kenyon said, “Strength in the second half of the year went a long way in reducing the decline. At mid-year we were down about 12 percent so more than half of the lost ground was made up in the second half.
“We had a big increase in new business that started in August and kicked in in the last quarter. We had a better fall season than in 1995, and spring 1997 looks good, so we’re looking for increased volume.
“Credit losses were relatively light, dropping to about 0.08 percent of sales against 0.18 in 1995.”
At NationsBanc Commercial, Stewart M. Long, president, explained that “three or four clients decided that they didn’t want to be factored anymore, and we weeded out 25 or 30 to better manage risk.” He said, “We worked in 1996 to improve efficiency. This year started out strong. January was gangbusters.”
With those two exceptions, it was a banner year for the industry, with many executives calling it the best ever in volume and profits.
CIT Group/Commercial Services held onto the number-one spot for volume. Although it showed what appears to be modest gain of 4 percent, that represents $500 million in additional volume.
Lawrence A. Marsiello, president and chief executive officer of the CIT factoring group, said, “We had an excellent year in 1996, particularly in the last half. The increase came from a combination of increased clients’ sales and new business.
“Apparel clients that showed the best gains were principally those selling branded goods to the upper-end department stores. Women’s sportswear, children’s wear and men’s wear led the pack. While men’s wear was strong in 1996, the gains were not as impressive as in the other two categories. I think the benefits from the casual Friday-wear trend has plateaued.
“Some of the more efficient vendors selling to the mass market also did well,” Marsiello continued. “Those selling commodity-type merchandise, but with the most sophisticated logistics and sourcing, were able to make money in the mass market. Generally our clients had better cash flows in 1996 than they did in 1995, but it was not across the board.”
“There are still many small vendors under unprecedented pressure by continued waterfalls of chargebacks and deductions,” he added.”Also, retailers are heavily dependent on national brands, and it’s very difficult to launch a new brand.”
Leonard Milberg, chairman and chief executive officer of Milberg Factors, called 1996 “the best year ever” but noted that “it’s getting much harder for a smaller manufacturer without a brand name to get by.”
CIT’s Marsiello added that while “many regional and smaller retailers are disappearing, the national chains had good years and orders for spring 1997 are ahead of last year.” He said, “We’re looking for a good 1997.”
Turning to the textile market, Marsiello said it was soft in the beginning of the year “but surged ahead in the second half.” He continued, “Even though we lost a very big textile client when Avondale acquired Graniteville [about $500 million a year], our textile business was up 11 percent.”
The number-two factor, BNY Financial, has been diversifying into nontraditional industries, but textiles and apparel still represent about 40 percent of its $11.2 billion volume.
Grimaldi said 1996 was “our 15th consecutive year of record earnings and volume.”
But, he added, business “continues to be tough, except for vendors with hot products.” Grimaldi explained, “If your product is hot, it sells. If it’s not, it doesn’t. With the downsizing and consolidations, there are fewer players sharing the same market. The more efficient can show a better bottom line. Margins remain tight, so the way to better profits is through expense reduction.”
He noted that the Christmas selling season, “which was supposed to be great after a couple of good days right around Thanksgiving, turned out to be just marginally better than 1995.” He added, “And that was no big deal, since 1995 was not a very good year.”
Heller Financial, which had a dip in 1995, showed a vigorous recovery in 1996, racking up a 13 percent increase to $7 billion. Roche said a good portion of the gain came from new business.
“We signed up over 200 new accounts last year,” Heller’s Roche said. “Our existing client base also showed some improvement, mostly in the last half of the year. At the end of the first half, existing client volume was down about 4 percent, but by yearend it was ahead about 2 percent.
“Among our apparel clients, young men’s and young women’s apparel was a very strong segment — juniors and jeans,” he said.
Funds in use at Heller rose 20 percent, principally through the company’s inventory loan program, Roche said.
Capital Factors, the only publicly owned factoring firm in the group, also had a very good year, with volume jumping about 30 percent, according to John W. Kiefer, president of the Fort Lauderdale-based firm.
“Last year was an excellent year for us. There were a few bankruptcies at the beginning of the year, and we thought that credit losses might be heavy, but the second half was very good, and we finished with bad debts of only 13 basis points (0.13 percent of sales), which is at the low end of acceptable.
“We signed up about $1 billion in new business, annualized, so 1997 will again show a good volume gain. Also, January had surprisingly few bankruptcies, but we’re still concerned about a couple of big-name retailers,” said Kiefer.
Capital Factors went public last year, raising $17.6 million in equity, so unlike other factoring firms, it releases its earnings in addition to volume. In 1996, Capital’s earnings were up 27.9 percent to $11.1 million, or $1.01 a share, from $8.7 million, or 87 cents. Atlanta-based SunTrust Bank was another winner in 1996 and expects an even better year, based on anticipated improvement in the apparel and textile business.
Austin Broadwell, senior vice president and manager of the factoring division of SunTrust Bank, said that while the firm has diversified, “textile-apparel still makes up most of our business, and we look for improvement in 1997.” He added, “What we saw in 1996 were some strong performances from a number of our apparel clients, although the converting area was a mixed bag. Overall, the volume growth came from a mixture of new business and core-client growth.”
John Heffer, president of Republic Factors, reported a good year, with most of the growth in the last nine months. “Volume was flat in the first six months, but we finished the year with a 4.7 percent gain. The credit situation has continued to attract clients looking for credit protection.
“Also, I’ve noticed that many of our clients are downsizing, cutting expenses and inventory risks and concentrating on profits. While this may cut into our volume we like our clients to stay in business,” said Heffer.
Moderate-priced goods sold to the mass merchants fueled the volume gain at Rosenthal & Rosenthal, according to Sandak.
“Volume really picked up in the second half of last year. For the first six months, we were slightly behind, but we ended up the year 8 percent ahead.
“Our business continues to get more of its volume from accounts that sell retailers rather than from the mills and converters. Bad debts in 1996 were very light. I’d be happy with losses at that level every year,” Sandak said wistfully.