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Industry Focus: Financial Advice for Surviving an Uncertain Economic Future

October 7, 2011

California Apparel News

by Deborah Belgum, Senior Editor

Economists and government gurus aren’t out spreading words of joy about the country’s economic recovery. Federal Reserve Chairman Ben Bernanke recently admitted that since June, he and other economists have changed their minds about how well the gross domestic product and unemployment numbers will shape up.

Rumors of a double-dip recession are looming, but apparel and textile companies that survived the last downturn have a lot of experience weathering the worst.

The California Apparel News spoke with various factors and lenders about surviving an uncertain future by asking this question:

With the country’s GDP expected to grow a mere 1.7 percent this year and 2.3 percent next year, how should apparel makers be strategizing for the future, and how difficult will it be to get accounts-receivable financing over the next 12 months?

Sydnee Breuer
Senior Vice President of Business Development
Rosenthal & Rosenthal

With the continued difficult economic environment and expectations—it’s not going to get much better anytime soon— apparel makers need to maintain tight inventory levels and keep expenses in line.

They should expect continued pressure on gross margins as their retail customers will be facing the same economic issues—the customers not opening up their pocketbooks.

It shouldn’t be any more difficult to obtain factoring or accounts-receivable financing from lenders who understand the apparel industry.

Of course, those lenders who don’t understand the apparel industry fled a few years ago anyway. At Rosenthal, we will still be looking at the same criteria that we always have, including strength/experience of management and how the collateral performs.

Mitch Cohen
Western Regional Manager
CIT Trade Finance

In environments like this, my suggestion is to plan conservatively; know your business, your customers, suppliers and professional advisoes; and focus on what you do best.

In terms of accounts-receivable financing, align your company with a lender or factor that understands your business and can help you navigate the choppy waters ahead. If you don’t already use credit protection or factoring, this is the time to start using it. Thousands of apparel companies have found it to be a cost-effective way to manage customer credit risk and enhance liquidity, two key elements that are crucial to success in this market.

Ron Garber
Executive Vice President and Regional Manager
First Capital Western Region

The obvious strategy would be to plan for a sharpened sense for profitability rather than a focus on growth. The same tried-and-true axioms of tight inventory control; razor-thin expense increases, if any; eliminating unprofitable customers; and searching for the most-economical sourcing suppliers will be standard operating procedure not just for 2012 but at least a year beyond.

The Fed has given us their best guess of things to come by signaling their intent of holding interest rates near zero through 2013—thus, a clear prediction to the manufacturing sector of no growth for the foreseeable future.

The good news is that banks and lenders, in general, are awash in cash and are searching for places to deploy their funds. I’ve noticed a recent uptick in competitive activity, especially from banks, in structure and pricing on asset-based lending deals. When we’re up against a bank on a deal and their structure is similar to ours, they will be anywhere from 200 to 300 basis points below us on pricing and will eventually win the business.

I have not been so much surprised with their pricing as I have been about their willingness to entertain “ugly” credits, which seems to run counter to what their regulators are requiring.

So I envision a fairly friendly environment over the next six months for a manufacturer to successfully find a suitable asset-based lending/factoring program if their current one is not totally fulfilling their requirements.

Rob Greenspan
Greenspan Consult Inc.

From what I am hearing from asset-based lenders, bankers and factors, accounts-receivable financing, including factoring the receivables, has not been a problem.

Major retailers, or at least the vast majority of them who have survived this economic crisis, continue to get credit in the marketplace. Some of the lenders require “surcharges,” as their credit has been deemed riskier than others, but credit is still being covered.

What I have noticed more and more is that smaller, one-store boutiques are not getting much credit, if any. I have seen manufacturers ask for and receive payments from the retailers using their credit cards. This area of business seems to have grown over the past couple of years and is becoming more of a common practice.

If a company has or wants to grow its specialty-store business, it should look into this type of transaction. Additionally, there are insurance companies that will insure the retail accounts receivables. While there is an internal and external cost to having accounts-receivable insurance, it may be worthwhile to look into these types of policies, as they can be designed to cover certain unique situations.

As for lack of growth in the economy, the same philosophies should apply to all apparel manufacturers and importers in order to survive. Try your best to maintain a gross profit margin where you can survive. Keep your overhead to a minimum, and don’t speculate on inventory. Do what you do best, and don’t try to compete in markets where you don’t have the necessary expertise to win.

Stay mean and lean until the economy improves. To me, that is the best strategic advice given the economic environment we currently live in.

Sunnie Kim
President and Chief Executive
Hana Financial Inc.

Given the still sluggishness in the marketplace, apparel manufacturers would be best advised to continue to keep expenses down, reduce inventory levels to as low a level as possible and concentrate on opportunistic purchases. However, if a company’s financial strength is solid, it could be the right moment to expand at very favorable prices.

Many available sources still exist in the marketplace for those companies looking for lending. However, they will need to have solid balance sheets and good overall financial strength.

Dave Reza
Senior Vice President, Western Region
Milberg Factors Inc.

Taking a look at future strategies for apparel makers, these are my recommendations:
• Apparel makers/importers should prepare for reduced demand and further price/margin compression. Consequently, more discounts and/or markdowns could result as retailers find their own top lines shrinking.
• Makers should tighten their belts on the expense and materials-costs side. Because commodity prices should contract with less demand, purchasing lead times should be cut back to take advantage of reduced market pricing provided that production cycle time is not impacted. Certainly, speculating on inventory purchasing to cover potential reorders should be done on a very limited basis, if at all.
• Balance sheets should be pruned to reduce excess inventories. SKUs should be reviewed to determine which styles should be cut or carried. Purchases should be restricted to inventory that is needed to support actual purchase orders.
• Old accounts receivables and factor chargebacks should be worked to raise cash or to identify write-offs. Any major capital expenditures should be reconsidered. A clean and liquid balance sheet will lead to better decision making by management. Ultimately, the level of this strategic preparedness will allow companies to survive business and economic slowdowns. The outlook for asset-based financing over the next 12 months is this:
• In recessionary environments, banks and asset-based lenders will typically cull their portfolios of poor-performing and more leveraged credits. Especially as a result of the financial crisis of 2008 and 2009, banks and publicly held institutional lenders face increasing regulatory oversight. Consequently, they are more sensitive to any signs of borrower stress.
• Typically, these large lenders and /or bank-owned commercial lenders want to see three years of income and positive cash flow. These dynamics are important but even more so in a poor economic environment. Borrowers with strong balance sheets are highly valued.
• Factors will often step into the breech and finance companies with more leverage than would banks and commercial lenders. In addition, companies that don’t currently use a factor will find great business value in the receivables-management and credit-protection services offered by factors. That being said, in a weak economy factors will also seek out relatively better balance sheets and look for their clients to be proactive in per forming solid financial “housekeeping.” All lenders will be more cautious about funding over typical collateral values.
• If the economy flattens out or contracts, it will be more difficult to get financing from banks and commercial finance providers. Even factors will look for opportunities with stronger borrowers. However, those companies that have a track record of prudent management will find that they will still have ample opportunities to obtain/change their financing.

Tri Sciarra
Executive Vice President and Los Angeles Regional Manager
Capital Business Credit

The general parameters of business protocol will not change for apparel makers in the next 12 months. That being said, manufacturers do need to stay more focused on overhead, inventory and gross margin. Overhead should be lean, and inventories carried on hand should be minimized.

Buying light will be a key component to maintaining margins given that in recent months, Capital Business Credit has seen department stores and discount retailers defer shipments, asking manufacturers and importers to hold onto goods for a longer period of time.

As it pertains to accounts-receivable financing, it is as difficult as ever for businesses to receive financing from a bank, as banks only look at a company’s balance sheet and past performance. In spite of this, there will always be lenders in the market that are willing to pick up non-performing bank loans. Companies such as CBC look beyond a company’s balance sheet—at the potential borrower’s management team, business model and collateral performance. This allows for more-flexible lending standards than a traditional bank that will not change in the next 12 months.

Kevin Sullivan
Executive Vice President
Wells Fargo Capital Finance

There seems to be little doubt that the economy is, at best, stagnant. We believe that as clients head into 2012, the best approach remains to focus on the bottom line as opposed to increasing top-line sales in this type of environment.

This isn’t to say that sales increases aren’t happening. Many of our clients are doing very well in this respect, but it’s a zero-sum game, and increases appear to be coming at the expense of competitors.

Now is a great time to review all aspects of a company’s business. If there are lower-margin products that may not add much value to the bottom line but soak up a lot of time and resources, many companies are choosing to exit those lines.

There is still more than adequate financing available for accounts receivable and inventory financing over the next 12 months. We think the bigger issue lies in the fact that selling the major retailers has become a more capital-intensive business as the expectation increases that vendors will hold inventory for longer periods of time.

Ken Wengrod
FTC Commercial Corp.

Companies have to prepare themselves for continued downturns and look at a potential double-dip recession. I am not enamored with what is going on financially.

Companies need to look at their inventories and expenses in a big way. There is plenty of money around. The issue is that lenders want to lend to good companies. If companies are sound, there will be money [credit] for them to expand.

Companies should exploit their niche market. We are seeing huge growth in foreign markets, especially in Latin and South America, where the middle-class is growing and exceptionally strong.

Exports is an area that companies need to look at to support their growth as well as exploit flash sites and Internet sites such as Rue La La and Gilt Groupe. There is business out there, but you have to look at the changing markets very carefully, understand them, exploit them, and create orders and sales because lenders are going to be very conservative.