Byline: Sidney Rutberg

NEW YORK — The economy is cooking, factoring executives say, but apparel manufacturers may just wind up getting burned. The big problem, according to these money people, is the increasing heat from retail consolidation.
The factors generally agree that the economy is strong and growing, but they are not that confident about the apparel industry outlook. While there are some pockets of optimism, primarily among Southern factors, many see the continuing consolidation of retailers into ever more powerful entities as a growing shadow over the industry.
In the face of these power-wielding customers, suppliers must accept paper-thin margins, hold and finance inventory for retailers and in some cases guarantee retailers’ profit margins. As an example of the economic power of the large retailers, one factoring executive cited a recent court decision that found a clause in Wal-Mart’s purchase orders “unconscionable.” This clause permitted Wal-Mart to cancel an order at will, any time before the shipment date, regardless of the supplier’s costs in making up the goods. As a further indication of the power of the retailer, the executive requested anonymity because he didn’t want to antagonize Wal-Mart.
Other negatives seen affecting the apparel business include:
The buildup of inventory at the retail and manufacturing levels because of the unseasonably warm weather in the Northeast.
Rising interest rates that are increasing the cost of financing inventory and discouraging spending, particularly by consumers hit with higher payments on adjustable-rate mortgages.
The fragility of the capital structure of some apparel suppliers, making them particularly vulnerable in a highly competitive environment.

With the apparel industry the subject of so many seasonal and secular problems, factoring firms that have traditionally focused on textile, apparel and related industries are beginning to diversify.
Joseph A. Grimaldi, president of BNY Financial Corp., one of the largest factors in the business, said his firm had been changing its client mix.
“Where a few years ago, textiles and apparel accounted for 65 to 70 percent of our volume, that is now under 45 percent. We now factor shipping companies, airlines, games. It’s a much more diversified portfolio than in the past,” he said.
BNY has diversified geographically with major investments in the Canadian market. BNY recently purchased BancBoston’s Canadian factoring operation following an earlier acquisition of another factor there. BNY is now the largest factor in Canada.
Another large factoring firm, NationsBanc Commercial Corp., is moving toward geographic diversification. Ronald Kissling, chief operating officer at NationsBanc Commercial, said his firm had “adopted a global view” and had purchased interests in factors in Canada and Mexico.
“Our strategic position is to follow the trade flows.”

Back in the U.S., some factoring executives, principally from the South, are optimistic about their businesses and apparel sales.
For example, John W. Kiefer, president of Capital Factors Inc. in Ft. Lauderdale, Fla., said he expected apparel business to be strong in 1995. “Our clients are beginning to show some upward momentum. Consumer confidence is high, but I’m concerned about interest rates. As mortgage payments go up, consumer confidence goes down.
“So far, the moves by the Fed to increase rates have not dampened demand. Rates are still not outrageously high and should not stop growth.”
Kiefer said he was not looking for a rash of retail bankruptcies, in contrast with some past years. “Last year we had a lot of problems, but this year our credit losses have been very small — the lowest in four or five years.”
Capital Factors’ volume will be up about 10 to 15 percent in 1994, Kiefer said, “and we’re projecting an even better increase for next year.” Another factor in the South, Austin Broadwell, senior vice president and manager of factoring at Trust Company Bank, Atlanta, is also looking for a good 1995.
“The consumer is out there buying apparel; we should have a good Christmas selling season and a good 1995. The only cloud I see is interest rates. They have been rising rapidly, but I don’t expect them to reach double digits.
“While the underlying economy is good, apparel retailers will have to be extra efficient and keep costs down to compete effectively. Retailers are very demanding and keeping suppliers’ margins very tight.
Also in Atlanta, NationsBanc Commercial’s Kissling said, despite problems outerwear makers are having with the warm weather, “I’m upbeat about 1995. The economy is doing well and there will be opportunities in the apparel business. The trend toward consolidation will continue among apparel manufacturers, retailers and factors, in some cases for companies to remain competitive, and in others for survival.”

But here in New York, factoring executives are more downbeat than upbeat.
Said Jerome M. Kenyon, president of Congress Talcott Corp., “Most of our apparel manufacturing clients are not getting the business they expected. They didn’t buy a lot, and they’re not selling a lot. I see quite a few people shopping around for financial accommodations because their bank or factor was not prepared to give them the financing they want. They’re shopping around, but nobody is grabbing them.
“There hasn’t been much of a turnaround for spring, but I think we’ll see a turnaround in the fall of 1995. So far, the improvement in the economy has not done much for women’s apparel. I don’t think the first six months of next year will show much improvement, but I hope the last half will be better.”
Lawrence A. Marsiello, chief executive officer of CIT Group/Commercial Services, the nation’s largest factor, sees the apparel business facing a period of sluggish growth.
“Those companies that are cost-effective and who can enhance their sourcing capabilities should do fairly well,” he said. “Results will also depend on the merchandise categories involved. There is no doubt that sales of professional clothing [career wear] are being cut into by the move to casual wear, the so-called dress-down days in the workplace. The underlying trend is that gains in casualwear will hurt sales of tailored clothing.”
As to the effect of the unseasonable warm weather on outerwear suppliers, Marsiello said the smart operators have been turning inventory into cash, but there is “no question that these firms will not hit their profit or liquidity targets.”
Marsiello said credit losses in 1994 have been at “acceptable levels,” but he was concerned about 1995.
“Many clients and customers have fragile capitalizations and are under severe financial pressure. There is the potential for an increased level of credit losses,” he said.

While he thinks the outlook for retailers is good, BNY’s Grimaldi is concerned about apparel suppliers. “As retailers get bigger, their demands become greater. Now they’re looking for guaranteed margins from suppliers. With consumer confidence very high now, retail business should be very good.”
But Grimaldi is also worried about rising interest rates. “The Fed seems obsessed with an inflation threat that doesn’t exist.”
Besides discouraging consumers, the high interest rates hit suppliers, Grimaldi noted.
“With the increasing power of the large retailers, suppliers now are stuck with building inventory, and they have the cost of financing it,” he said.
Andrew H. Tananbaum, president of Century Business Credit Corp., was also concerned about the glut of inventory and increasing concentration in retailing.
“The unseasonably warm weather in November and December is already hampering efforts to clean up fall inventory at the manufacturing and importer level,” Tananbaum said.
He added consolidation in the retail field has allowed retailers to shift the inventory risk to the suppliers. “These retailers also have the muscle to keep vendors’ margins very slim.”
Another by-product of retail consolidation, according to Tananbaum, is a concentration of credit risk.
“Take the Federated/Macy’s merger, for example,” he pointed out. “Where a supplier had two customers, it will now have one. This will result in enormous exposures for suppliers.”
Among the least optimistic is Jerry Sandak, executive vice president of Rosenthal & Rosenthal, who said, “The apparel business right now is poor. The warm weather has forced very early markdowns on fall merchandise. Some retailers are starting to bring in resortwear early. There’s a lot of fall goods being closed out.
“As for 1995, about the only thing I see working to increase business is the growing population; the sheer weight of numbers,” he said. “But with interest rates going up and consumers with adjustable mortgages hit with big monthly increases, I don’t look forward to a wonderful 1995.” — Fairchild News Service

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