SPENDING SLOWDOWN EXPECTED TO IMPACT RETAIL APPAREL SALES

Byline: Thomas J. Ryan

NEW YORK — It’s time to batten down the hatches.
While not predicting anything near a recession, the money crowd expects many apparel suppliers and retailers to struggle with a slowdown in consumer spending in the second half. Factors, bankers and Wall Street experts believe the Federal Reserve’s six interest hikes will crimp economic growth, though most anticipate the often-cited “soft landing.”
Observers lamented that many stores are already deferring fall orders given the weak retail sales in May and June and the overall sour economic projections. The disposable incomes of more budget-conscious consumers will likely go toward digital technology gadgets and for home decor rather than apparel, which is seen as being hurt by a lack of hot fashion items and a deterioration of some core department store brands, they said. Indeed, many expect stores will be planning inventories and fashion more conservatively to avoid markdowns in a dimmer sales climate.
Financial maneuvering has also become more difficult as banks tighten up on credit, the number of factors dwindle, the high-yield market stays limp and both retail and apparel stocks remain depressed. This will stifle chances for equity offerings, recapitalizations, and M&A (mergers and acquisition) activity for many. Bold players may pick up companies on the cheap if they can finagle the financing. But they see an intensifying of activity among e-commerce firms — both mergers and disasters — during the second half of the year and in early 2001, with a few concerned about potential layoffs from Internet start-ups.
Longer-term problems also concern many of the money pros such as the shift to everyday business casual, the impact of B2B direct-sourcing Web sites on importers and the increasing demands by retailers requiring stern shipping compliance and inventory storage.
Nonetheless, most expect funding will be available for basic working capital needs. Also, while slowing, it’s still a good economy with ample employment, and firms will get chances to do well, particularly for those retailers attuned to their clients’ wants and those with the right product.
The following is a synopsis of their views:
John Daly, executive vice president at CIT Commercial Services: “Business appears to be soft. There’s a glut of inventory at retail, and fall orders are being deferred so the retailer can move out spring goods. It looks likes it’s going to be tougher than it has been in a while. Denim looks like it’s doing better, and the softer shoe business appears to be doing better. But the stores bought a lot of private label directly from the Orient, and domestic suppliers are taking the brunt for the stores’ overpurchases.”
Gilbert Harrison, chairman at Financo: “I’m cautiously optimistic. So much of the apparel sales are psychological and tuned into how consumers feel. People don’t remember the seven-year bull run, only yesterday. Funding has been very difficult. Banks either go all the way or no way at all and it’s been very frustrating in negotiating some of the transactions in which we’re involved. Apparel has not consolidated the way retail has consolidated, and we have some of the best companies that we have ever had in our portfolio. There’s a tremendous buying opportunity for those who believe in the future.”
John Heffer, president at HSBC Business Credit (USA), formerly Republic Business Credit: “We’re finding there definitely is softness out there. We see some deferral of shipments and in general, business is harder both at wholesale and retail. I’m concerned about the impact of business casual on the overall apparel business both in terms of total dollars and who gets those dollars. Companies that have large interest obligations and large debt payments coming due have an additional burden particularly in a slow economy. But there is plenty of money for well-run businesses and that makes sense. The gamblers may be retrenching a little.”
Lissa Baum, senior vice president at Israel Discount Bank: “Clearly the general sentiment is not buoyant. The industry has been good over the last couple of years and everyone is hunkering down a little bit and looking at overhead and how they can do things more efficiently. We’re watching some in our portfolio closer than we did last year, but there’s some niche companies as well as product categories doing well.”
Elizabeth Eveillard, managing director and investment banker at PaineWebber: “Many apparel and retail stocks are near their lows for the year. We’re seeing a little bit of a comeback, but not enough to get people into the secondary market or encourage IPOs. Unless this turns quickly, the fall window for financing for retail and apparel companies will come and go and companies will have to wait until 2001.”
Peter J. Solomon, head of the Peter J. Solomon & Co., “We are in a period of slowdown. Consumer debt is enormously high. We’re in one of those periods where no one knows what’s going on. Retailers are so upset about their stock prices that they can’t believe it, but these are times you’ve just got to grin and bear it. There’ll be a huge amount of disasters and mergers in the dot-coms in the second half, and a flood after Christmas.”
Ward Mooney, president of BankBoston Retail Finance: “Sales have definitely been sluggish. I don’t see any major (retail) failures on the horizon right now, but I do see a trend toward slower growth. It will pretty much be status quo with the ones that are the leaders now continuing to be the leaders. The world of cash-flow funding not only for the retail industry but many other industries has dried up.”
James Kelly, managing director at Vestar Capital: “The financing markets are deteriorating. The high-yield market is for the most part nonexistent, and there are signs that the bank market, which has absorbed a lot of that capacity over the last several months, is getting a lot tougher as well. Financing is very difficult and the equity markets aren’t in the position to bail out these less mature ventures, be they dot-com or start-up capital. It’s also very difficult to finance going private for a lot of these public apparel companies that feel their stock is undervalued. So I think we’re in a wait-and-see pattern here because people want to understand where a bottom is.”
Stanley Officina, president at Sterling Factors: “Looks like fall has already come and gone and nobody noticed. We’re in the middle of July and there’s an awful lot of fall business that was anticipated that did not materialize. But some of our smaller clients are doing inordinately well because the stores seem to be looking for new ideas and new products.”
Jerry Sandak, executive vice president of Rosenthal & Rosenthal: “The weaker people have been suffering more than the stronger people so we may be looking at some additional problems in the second half. But I’m looking for a generally decent second half. The economy does not seem to warrant the recent weakness at retail. The number of people who are unemployed is modest and only a few items, such as gasoline, are serious detriments. There’s still plenty of money out there.”
Stewart Cohen, chief executive officer of Paragon Capital LLC: “Apparel guys are going to be in for a challenging second half. Last year, the stock market was good and everyone was fat, dumb and happy. Although it’s still a good economy, consumers don’t feel as free and are scrutinizing their purchases. You will start to see some of these name-brand guys start to flood the off-price markets, further making the marketplace very, very tight. There’s a wonderful supply of money out there, but what we don’t have is a lot of good places to put it.”
Adam D. Winters, vice president of business development at Merchant Factors Corp.: “The economy is slowing down a little bit, but I think its going to be a soft landing as opposed to an abrupt crash. Most of our clients’ volumes are up nicely. We deal mostly with growth companies that typically are either growing substantially or going out of business. There should be funding for manufacturers because there are so many different levels of lenders.”
Paul D. Schuldiner, managing director at Transcap Associates, a provider of purchase order and trade finance: “The smaller, less well capitalized operator is going to have a tough fall. There’s not a lot of room for error. We still see licensed products and urbanwear as positive parts of the market, but it’s tough for people doing private label programs or a second-tier brand with no special design. You need some sizzle behind it.”
Miles Stuchin, president at Access Capital: “The stores need the small guys because they bring fresh ideas and bring them in faster, but the big guys like buying from small guys who can service them. To be successful, a smaller guy has to really understand what the channel requirements are in terms of EDI requirements and shipping issues. They have to do a lot of little things right; if they can do one or two things, it’s not enough.”

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