California Apparel News

This year is stacking up to be the year of uncertainty.

The stock market is on a roller-coaster ride, California’s minimum wage in July transitions from $8 an hour to $9 an hour, and many larger companies will be obliged to cover the healthcare costs of all their full-time employees.

Add to this reports that consumers are still shy about shopping, inventories are high and the economies of some emerging markets are starting to downshift into low gear. The result is many companies will be dealing with new challenges and old worries.

A number of financial experts shared their thoughts on how 2014 will shape up for apparel manufacturers and how to avoid some major pitfalls.

Financial experts weigh in on how apparel manufacturers will fare in 2014 and what challenges to expect in the months ahead.

What economic challenges will manufacturers see in 2014, and how will it affect their ability to get financing?

Sydnee Breuer, Senior Vice President, Business Development, Rosenthal & Rosenthal

The year 2014 is shaping up to be a time of uncertainty for manufacturers. Changes in minimum wage and healthcare reform will most likely challenge the profitability of manufacturers.

Internationally, credit seems to be harder for the importers to obtain, which stretches their cash-flow needs. The consumer is not yet in a full-spending mode, so retailers are seeing mixed results.

With all this put together, the manufacturers and importers need to continue to manage their gross margins as retailers will continue to pressure for lower pricing while expenses continue to rise.

The ability to get financing will be mixed. There seems to be a lot of lenders in the market with money to loan. That would lead one to believe that it would be relatively easy to get financing. And that’s true—for the right deal with the right lender.

Fundamentals should still prevail. So it will remain tough to get financing if cash needs are tight (lack of trade credit and having to pay for goods upfront/upon shipping), the manufacturer is showing continued losses (lower margins, increasing expenses) or the company has weak financial conditions.

Mitch Cohen, Western Regional Manager, CIT Trade Finance

Some of the economic challenges manufacturers are experiencing in 2014 include pricing, a growing trend toward consigned sales by retailers and more options for consumers.

Manufacturing suppliers are moving out of China to other countries based on growing stress related to pricing. This move out of China means retailers are requiring vendors to manage their logistical issues. This also results in vendors carrying more inventory as their timing to deliver goods has shortened significantly.

Lastly, the consumer has become more knowledgeable of his or her options, which forces retailers to be more in line with low-cost providers. This affects margins and profitability, which could lead to more difficulty in finding financing.

Ron Garber, Executive Vice President and Regional Manager, First Capital

I think the major challenge or question facing manufacturers in 2014 is the possibility of interest rates rising sometime in the third or fourth quarter.

We now have a new Federal Reserve chairman, Janet Yellen, and although she seems to be aligned with the policies of her predecessor, Ben Bernanke, she could see some things differently and ultimately take a different course than he followed. I’m not saying that rates will increase markedly, but obviously the Fed has seen some sustained growth in the economy, resulting in them curtailing their bond-buying program and unemployment dropping below 7 percent.

So I think their focus will shift to closely monitoring the inflation index for any signs of over-stimulation. Any upward movement in the index starts to trigger thoughts of raising interest rates, which can have a direct impact on a manufacturer’s bottom line.

This doesn’t necessarily lead to difficulties in obtaining financing for day-to-day operations, but it certainly can make it more expensive. The manufacturer does have some control over the impact of rising rates by keeping their borrowing needs as low as possible through exercising some sound managerial fundamentals. Those include minimizing overhead, maintaining lean inventories, and/or accelerating cash flow by means of utilizing a well-structured, asset-based facility.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

This year is a year to keep tabs on what is happening with your retail clients. If Sears/Kmart and JCPenney are significant customers, you should already be concerned about their credit worthiness.

I have been told by my clients and the factoring community that, in almost every case, these customers are either being surcharged upwards of an additional 2 percent or the factor is approving credit on a risk-sharing basis such as 75 percent is factor risk and 25 percent is the manufacturer’s risk, and orders are only being approved within 30 days of shipping.

I have also seen some orders to these retailers starting to be declined (by the factors.). Not being able to produce and ship large orders can have a disastrous effect on your company’s bottom line. The same bad result could happen if you ship on your own risk and a Chapter 11 filing (by the retailer) occurs.

Additionally, your lender may reduce or eliminate the advances you take on these accounts receivable. Any and all problems with credit issues from these or other large retail customers would most likely inhibit the company’s ability to get credit and cash flow.

While the year has started off with little consistency in the stock market, any economic downtown—such as slow job growth, a decline in jobs or company’s missing their financial sales and earnings projections—could cause a slowdown in retail spending. The economy needs continued consumer spending. Anything that might cause a slowdown of that spending would have a negative impact. To the manufacturer, that could mean additional chargebacks or return of merchandise. Both can cause a financial problem.

For the past number of years, interest rates have been historically low. At some point, we should all expect to see an increase in the rate charged. When that will happen is anybody’s guess. But as interest rates start to increase, one should expect to see reductions of spending at some point.

We all hope for only good things in 2014. However, manufacturers should have an action plan in place in case any of these events occur. Be as prepared as you can.

Nick Hart, Managing Director, Bibby Financial Services

For manufacturers in California, one concern is the increase in the minimum wage (on July 1 to $9 an hour), which will have an inflationary drive on costs. Another minimum-wage increase to $10 an hour will follow on Jan. 1, 2016.

However, the bigger impact will come from the implementation of the Affordable Healthcare Act. Businesses with more than 50 employees must have a healthcare provision for all full-time staff. For the garment businesses, especially the sewing shops, this represents a massive increase in cost—probably $250 per month per employee. This could represent a 30 percent increase in staff costs.

There are a number of results that may occur.

1. Prices go up. Difficult to achieve.
2. Factories close.
3. Factories continue in a non-compliant status, risking huge fines starting January 2015.
4. Low-paid workers are moved to part-time status with less than 30 hours per week to avoid the cost. That would push low-income families into poverty or require a second job to make up the lost income.
5. Increased use of temporary staffing agencies to avoid healthcare provision for one year and to manage hours and staff.

Nobody can argue with the intention behind the healthcare provision for all. However, it will have significant pressure on local manufacturing just as the “Made in USA” push is gaining momentum.

Speaking to a healthcare provider specializing in small businesses, they stated that there is a complete panic in the marketplace.

Brands should ensure that their local supply chain is compliant to avoid retailer inspection problems in 2015.

“Made in USA” is very much a viable option, but brands have to leave enough margin for their suppliers to be compliant. Also, they need to educate store buyers that a compliant supply chain is important and that it also comes with a financial responsibility that needs to be paid for.

Sunnie Kim, Chief Executive and President, Hana Financial

Unfortunately, manufacturers continue to face tough challenges in the coming year.

Competition will be keen as the number of retailers continues to shrink—illustrated by how many mid-tier retail failures there have been thus far.

Also, the poor weather conditions of late have hampered shipping to affected parts of the country. Another concern may be the effect of the increased minimum-wage rates, both in California and federally, which will drive costs higher and/or reduce efficiency in companies that attempt to fulfill the same production with fewer employees.

The aforementioned will likely cause tightened cash flows for most manufacturers. Therefore, it would be prudent to arrange alternate financing such as an over-advance facility in order to best avoid problems in the near term.

Dave Reza, Senior Vice President, Milberg Factors Inc.

Manufacturers will continue to face a multitude of economic challenges. Macro challenges such as employment levels, consumer debt, healthcare and tax rates have consequences that affect all consumers and ultimately manufacturers and importers. Regardless of what happens on a broader front, our clients who sell consumer products continue to face challenges from both the supply and selling sides of their business.

For apparel manufacturers/importers, there are any number of micro-economic factors that also affect their viability. Two of these are supplier and customer issues.

On the supply side, shrinking soft-goods production and labor capacity in China will continue to drive up product costs as well as compel production shifts to other countries. As manufacturers transition to new production sources, infrastructure, local financing and regulatory issues may impact both quality and deliveries.

On the customer side, non-branded manufacturers will continue to compete with private label and/or direct purchasing by their major retail customers. Further, retailers fighting for their own marketshare (and even their very existence in some cases) are placing increasing demands on manufacturers for margin support.

So manufacturers are increasingly challenged to manage complex and new logistics and contain costs while trying to sustain customer margins. All this is required just so they can compete for limited open-to-buy dollars.

To succeed financially, when faced with these challenges, is a difficult task. Even historically successful enterprises may be challenged to grow or even maintain comparable year-over-year sales volume. Cost inflation coupled with margin erosion will muddy financial results.

Borrowers will need to better forecast and articulate their forward requirements to current and prospective lenders. Fortunately, the readers of the California Apparel News work for and/or own companies financed by factors, banks and equity groups who are used to servicing this specialized clientele.

Many of us subscribe to the maxim that “we lend to companies but take risks with people.” Borrowers who demonstrate character and capital coupled with consistent and sustainable operating results will continue to be supported.

Paul Schuldiner, Managing Director of Business Development, King Trade Capital

The retail climate currently can be defined as challenging at best. The severe weather conditions throughout most of the country will have a dampening effect on retail traffic and consumer spending, which has already tightened as disposable incomes are not necessarily rising.

Other than the possible benefits of closeouts and online retail purchases, these conditions may lead to excess inventory levels, which will affect the margin and sell-through requirements imposed by retailers on manufacturers.

There are a number of well-known retailers who have had questionable financial conditions in the latter part of 2013 with no significant improvement in sight. This may make approving the credit on future orders from these suspect retailers difficult or more costly to finance from factors and banks as well as purchase-order financiers.

Manufacturers and importers are also continuing to evaluate production options throughout the global supply chain as costs have increased in China and many small- to medium-sized manufacturers in China are still requesting deposits ranging from 10 percent to 30 percent down when an order is placed with a factory in China.

There is significant payment risk in sending deposits to overseas suppliers, and there is no corresponding collateral availability created at the time a client elects to send deposits. This will limit financing provided by conventional lenders to the apparel industry and require U.S.-based importers of finished garments from China as well as domestic manufacturers who source fabric from China to find alternative sources of supply and/or new financing methods to secure production.

Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance

The biggest challenge that we see manufacturers facing in 2014 relates to the rapidly shifting face of the retail customer base.

As some of the major retailers begin to re-evaluate individual stores in an effort to right-size, this, in conjunction with the financial results posted by some of the retailers, has many of our clients constantly reviewing what the appropriate customer base for their respective businesses should be.

With fewer doors to sell and few alternative customers to add to the mix, it definitely presents a challenge to growth. There is also little doubt that the continued shift to online shopping adds another element to the decision-making process.

As major retailers continue the push to deal with fewer vendors in each category, we are also seeing more distributors emerge as players across various industry segments. The challenge that this can create is that while a given distributor may carry a large number of brands selling to many of the major retailers, a manufacturer shouldn’t assume that by virtue of the distributor dealing with many major retailers, the credit worthiness of the major retailers automatically passes along to the distributor.

It remains very important to know who the customer is and what the financial wherewithal is of the entity the manufacturer is actually billing, as opposed to just the ultimate end user of the product.

This can also become a key decision point for lenders as they evaluate the ability to lend against accounts receivable due from distributors in lieu of the ultimate end user of the product.

We also see manufacturers that have a retail presence of their own beginning to evaluate how many retail stores they truly need to successfully augment wholesale business. Expansion of retail stores owned by manufacturers has generally slowed as they begin to evaluate the need for a bricks-and-mortar presence vs. online sales.

It’s also becoming much more the norm for newer companies to launch with a specific focus on developing an online strategy right out of the gate as opposed to developing the brand and then launching the Internet strategy.

Ken Wengrod, President, FTC Commercial Corp.

This year promises to deliver a true economic recovery for manufacturers as long as we don’t experience a further debt crisis in the United States. Economic challenges will impact our industry in many areas.

Labor prices may continue to rise, domestically (minimum wage increases/ healthcare costs) and worldwide. Manufacturers/importers will need to be vigilant in identifying new sourcing partners. It’s critical that management teams constantly improve their internal systems and processes to maximize efficiencies. Speed-to-market is essential. Supply-chain management will be a critical factor for manufacturers and importers.

Expect market turbulence if conservative spending habits in the western global market continue. Consumers will keep looking for the best value because they have many more options available to them at their fingertips. The race is still going on, with heavy pressure on the bricks-and-mortar retailers to continue to attract consumer spending lost to Internet sales and to bolster margins at the expense of suppliers.

There will be plenty of capital around. Lenders will be supportive and more accommodating to well-run companies with established growth.

As chairman of the regulatory and legislation committee of the District Export Council of Southern California, I foresee significant growth with domestic apparel manufacturers that know their true customers well.

There will be strong demand in the emerging and developing markets for U.S.–designed and -made goods, especially those reflective of the Los Angeles lifestyle.

This year, U.S. manufacturers should focus on promoting exports of their merchandise with global economic growth expected to come from the emerging markets, especially Asia, Africa and Latin America.

The Obama administration has prioritized the importance of expanding U.S exports and offers special export assistance to companies through the U.S. Department of Commerce via their “Gold Key Matching Service” as well as through the Export-Import Bank of the United States.

Companies need to find commercial lenders who embrace exports and treat export the same way they lend against domestic sales.

Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

The U.S. economy lost some of its momentum the last few months, creating an uncertain environment for manufacturers and consumer spending.

December and January job reports were below expectations, and recent retail sales, auto and manufacturing data were also disappointing.

The severe winter storms have made it difficult for folks to determine if the economic weakness is temporary or part of a broader slowdown. In this environment, manufacturers that are successful in securing bank or private-equity financing generally have one or more of the following characteristics in common: strong brand, scale (size), niche product or a leader in an attractive category.

Companies with these characteristics will continue to have access to funding while others may need to reconsider their strategies. Categories that are currently attracting the most interest from private-equity investors are accessories, athleticwear, contemporary, footwear and menswear.