Byline: Kristi Ellis / Kristin Young

Economic forecasters peering into their crystal balls for the first half of 2001 see a slowdown in one of the longest economic expansions in U.S. history.

A stammering stock market, higher energy costs and spendthrift consumers are expected to hit manufacturers and retailers where it counts. But experts admonish that the West Coast isn’t headed for an outright recession, at least not one compared to the downshift of the early Nineties, when California experienced its worst recession since the Great Depression.

Consumers may ease up, but they won’t stop cold turkey. A recent UCLA study projected that personal income for Californians will rise 6.7 percent in 2001, the weakest increase in five years, but not the worst-case scenario.

“The days of high-single-digit to low-double-digit same-store sales increases that we have seen the last few years are a thing of the past,” said Kurt Barnard, president of Barnard’s Retail Consulting Group.

Indeed, Los Angeles County’s taxable retail sales increased 9.9 percent to $69.5 billion last year, Orange County rose 10.9 percent to $27.5 billion and Riverside and San Bernardino Counties jumped 11.7 percent to $22.6 billion.

“We will see sustainable increases in the range that retailers will learn to accept as good, [such as] 4 percent,” said Barnard.

The latest Consumer Confidence Index from the Conference Board fell to a yearly low of 133.5 in November, and reported that consumers were less positive about the first half of 2001.

Barnard predicted the greatest pressure will be on department stores. Seattle-based Nordstrom struggled in the latter half of 2000 due to sagging sales, a floundering formula and merchandise misfires. A top management shakeout in September returned family members to the helm.

San Francisco-based Gap Inc. was also confounded by same-store sales decreases, fashion problems and high turnover at the management level.

Meanwhile, discounters are best poised to sustain hits.
“The deeper the discount, the better same-store sales,” Barnard said.

“As consumers pull back, they tend to make dollars stretch further,” agreed Tony Cherbak, consumer products group partner of Deloitte & Touche in Newport Beach, Calif. “The Targets and Wal-Marts of the world will reap the benefits of the pullback.”

Late last year, Target snapped up four of the now-defunct Fedco stores, increasing its Los Angeles units to 76.

Southland urban neighborhoods are expecting more Wal-Marts and experts widely expect about 20 to 30 Kohl’s stores to arrive on the West Coast in the next few years. A Kohl’s spokeswoman declined to comment on the potential move.

Experts agreed that retail is softening, but it’s in no way taking a nosedive. Heavy consolidations that could significantly impact the segment are not expected. The slowdown should be relatively short, about six to nine months, they forecasted.

“The underlying economics for retail are still good,” said Richard Giss, retail services group partner of Deloitte & Touche in Los Angeles. “We have low unemployment, relatively low interest rates. The clouds on the horizon are the stock market and energy costs.”

Apparel manufacturers are bracing themselves for a downturn in the first half — one that could result in more consolidations and even some bankruptcies.

“Retailers are buying closer to the vest than before and there is extra pressure on manufacturers who are being asked to act as a stock house,” said Robert Lewin, senior vice president of CIT Commercial Services, among the largest factors in Los Angeles.

Factors, Lewin said, are tightening up credit lines and closely watching manufacturers who are struggling.

“There will always be mortalities in the market,” he said, adding that companies will have to maintain growth rates, market share and margins to combat the softness in the market.

Industrywide, manufacturers have been forced to shift increasingly to offshore production to maintain higher inventory levels and keep prices low.

Ongoing production in Mexico, Asia and the Caribbean has, in turn, hurt employment in certain counties, noted Jack Kyser, chief economist at the Los Angeles Economic Development Corp. Although the state’s apparel employment has held steady at 144,200, Los Angeles County will continue to be the hardest hit, with another 2,000 jobs in low- and moderate-priced clothing manufacturing moving overseas.

“It is a gloomy picture,” said Kyser, noting declines in individual counties in Southern California will likely continue through the first half.

Some 40 to 50 percent of California-based production is made in Mexico, with half derived from new business in the last year, reported Joseph Kofsky, an industry veteran and Moss Adams, LLP consultant.

But even production in Mexico has eased up.

“Business is soft and inventories are very high,” Kofsky said. “It’s quiet everywhere right now.”

As retailers vie for fewer dollars, manufacturers are feeling the heat.

The constant retail pressure does not bode well for manufacturers, said Jeffrey Kapor of Buchalter Nemer Fields & Younger, among the larger law firms here and representing 200 apparel clients.

Bankruptcies will increase, he predicted.

“It reminds me of the days when interest rates were 18 percent and people didn’t pay their bills, because it was cheaper to pay a lawyer to fight the bills than borrow at 18 percent,” he added.

Spring and summer bookings in many categories are down across the board, compared to the same period this year.

Factors are tightening credit lines and cautiously watching for market fallouts. Last year, several major companies faced considerable financial problems, leading to closures or restructuring. Among the developments:

Jalate Ltd., a publicly traded moderate junior sportswear firm, shut its doors in September.

CL Fashion Inc., which operates Chorus Line Corp. and Carole Little, closed Nov. 17 and, at press time, needed to decide whether to liquidate or convert an involuntary Chapter 7 liquidation into a Chapter 11 bankruptcy court protection reorganization.

Mossimo Inc. was forced into Chapter 7 involuntary liquidation, but settled with creditors, signed a $1 billion exclusive licensing deal with Target Stores and got out of wholesaling altogether. The financially strapped sportswear brand is pondering its next step to remain in business.

Esprit de Corp has completely reorganized to reclaim lost market share.

This is the tip of the iceberg, said analysts such as Ron Friedman, president of Stonefield Josephson Accountancy.

“We project next year to be a much bigger year in terms of bankruptcies,” he said, adding that he expects his financial recovery business “to have a good year in that area.”

Consolidation has flattened much of Friedman’s apparel client base, comprised of 275 apparel makers.

“The fourth quarter looks awful because retailers have not been doing well and our clients are not booking dollars,” he said.

Survivors will undoubtedly keep an eye on controlled growth, sales and margins, he said.

“There is a level of business where you can’t cut expenses anymore and you need gross profit margin and sales and that is difficult today,” Friedman said.

Not all sectors are singing the blues. Textile manufacturing actually inched ahead by 200 jobs to 27,000 last year.

Other pockets will remain strong through the first half, analysts said, including the fast-turnaround world of junior fashion — even as some production moves outside the country.

“We have seen an enormous reemergence in the junior business here,” said Larry Jacobson, a partner in Stonefield Josephson Accountancy Corp., naming Hot Kiss, LEI and Mudd as set “to emerge as brands.”

Specialty stores targeting the junior customer — Hot Topic, Wet Seal and Pacific Sunwear — are expected to hold their own.

Kofsky of Moss Adams predicted good years for BCBG Max Azria, Volcom, Hurley International, LEI, Lucky Brand Dungarees and John Paul Richard in that arena.

“They’ve done their homework and they are in tune with their customers,” he said.

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