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No Trump Effect Yet on Lending Landscape

February 16, 2017

Women's Wear Daily

Taxes and trade are the two areas of concern.

By: Vicki M. Young

Wait and see, and hope for the best.

That’s the general consensus among lenders and consultants while they wait out the first 100 days of the new administration under President Donald J. Trump to get a clearer picture of economic policies and their impact on the fashion industry.

Michael Stanley, managing director of factoring firm Rosenthal & Rosenthal Inc., said so far there’s no change in lending or criteria. He noted that the current time period is a waiting game since “no one is sure of what he will do. And no one is sure of what he will be able to get through Congress.”

For now, Stanley said the expectation is that the economy will grow at a 2 percent, maybe 3 or 3.5 percent, rate. He noted that there are concerns ahead. A big one is the possibility of a border adjustment tax. According to Stanley, there’s a “great disparity with what we export than what we import. Any adjustment in taxation would have a major impact on our industry.”

Stanley also expressed concern about the new presidential order on Jan. 25 to construct a wall along the U.S. border with Mexico to cut down on the number of illegal immigrants. “We get some of our food from Mexico, and other products. Who is going to pay for the wall? At the end of the day, we’re going to pay on product from Mexico. We export $6 billion and we import $4 billion,” Stanley said, adding that the extra costs for goods and food from Mexico would be passed along to the consumer, which ultimately would have an effect on consumer spending.

Andrew Tananbaum, executive chairman of Capital Business Credit, said, “Right now, I think the economy is still growing slowly. In my opinion, luxury is doing better than the midtier businesses. The midtier retailers and mall retailers have been suffering, while the discount stores are doing better.”

Tananbaum is expecting the economy to grow in the 2.3 percent range this year, and said “we aren’t likely to see any price inflation unless the Trump effect and all the issues around imports are taken into account.”

At Turnaround Management Association’s New York City presentation last month, Prof. Edward I. Altman of the Stern School of Business at New York University reviewed 2016’s risky debt performance and took a look at default rates since 2009. During the presentation, he spoke briefly about potential policies on taxes and trade, noting that changes in the latter “could cause a meltdown.” Should the trend be toward protectionism, that “would be costly to trade,” he said, since that would impact expectations for economic growth. But an even bigger concern is the possibility of lower taxes. He said that lowering corporate taxes is not a bad thing, provided certain loopholes are closed. But Altman went on to note that the U.S. is not a distressed country, and the lowering of corporate taxes could impact the “amount of leverage [the chief financial officer puts] on the balance sheet.”

Altman also raised the question about the federal government’s ability to have a balanced budget. “As you lower taxes and spend a lot more on infrastructure, the deficit is going to suffer — a lot…. [With a Republican administration, you have to think] ‘When was the last time we had a balanced budget?’ The last time was when President Clinton was in office…. [The Republicans] better come through with higher growth, otherwise this country could be [seeing a] debt debacle,” the professor warned.

Closer to home for retailers and their suppliers, Gabriella Santaniello, founder of fashion and retail research firm A-Line Partners and former managing director for retail market research at Wedbush Securities, said, “It’s been an extremely volatile season…. You have plan A, and there’s got to be a plan B for backup. There’s a lot of pressure because of the decline in mall traffic. There’s the threat of tariffs and every single retailer will be affected in some form. They are trying to address it, but don’t know what will happen. It’s a guessing game of how do we prepare best, and it has created this looming sort of dark cloud above retail.”

As for where we are right now compared with a year ago, Christa Hart, who leads the retail and consumer products practice at FTI Consulting, said, “It all feels relatively the same. [President] Trump is the wild card — that’s changed. All of the underlying indicators [suggest] that we should see similar things in 2017 that we saw in 2016, and 2016 was a difficult year for retailers.”

According to Hart, a 3 percent overall growth rate range for 2017 is about right, but she also noted that growth in apparel has been flat, with women’s down 0.5 percent. Apparel pricing in the last few years has seen price deceleration, and Hart noted that as a percentage of discretionary spending, apparel as a category has also been on the decline for the last four or five years.

She said that there’s “not enough room in the margin structure to absorb pricing increases, so any increase will be passed on to the consumer.” That said, Hart also expects suppliers to become “even more nimble about moving production into areas where they experience less tariffs.”