California Apparel News

Despite a bumpy first half of 2024, which saw a number of bankruptcies and retail closures, there exists an air of guarded optimism as the apparel industry enters the second half of the year. There are uncertainties that lie ahead including the direction of interest rates, continued political and military conflicts around the globe, and the 2024 United States presidential election.

With a keen business sense, a bit of guidance and even greater caution, decision-makers in the apparel industry can successfully navigate through the hurdles caused by these issues and beyond to survive into 2025. California Apparel News asked financial leaders in the apparel business: What successful strategies did you recommend for the challenges faced in the first half of 2024, and how should apparel-industry professionals approach the second half of the year?

Darrin Beer

Western Regional Manager

CIT Commercial Services—a subsidiary of First Citizens Bank

 Most of the strategies discussed with our apparel clients earlier this year still apply going into the second half of 2024. We continue to emphasize inventory management, including diversifying the vendor base and managing product purchases in line with confirmed bookings.

With some exceptions, sales for the first half of the year for most apparel companies were relatively flat or slightly lower than the prior year. Hopes that the Federal Reserve would begin lowering interest rates by the end of Q2 were not realized. Now it’s looking like a Q3 or Q4 event. Rate reductions would be welcome relief for many apparel companies who have been carrying higher loans and thus greater financing costs. Recent increases in shipping costs have also put pressure on margins and expenses.

Most of our clients believe the second half of 2024 will improve as many retailers have adjusted inventories to lower levels and therefore have more ability to purchase goods to stock shelves. Of course, the consumer will need to cooperate and be willing to shop. Ultimately, the same message from the first half of 2024 applies equally well to the second half: Apparel companies should diversify their supply chains and manage inventory purchases and expenses in line with forecasted sales.

Mark Bienstock

Managing Director

Express Trade Capital

 During the rising-interest-rate environment in 2023, we advised our clients to pay extra attention to their inventory levels. The ongoing struggle to determine the correct balance of inventory to maintain has caused many apparel companies to realize a substantial increase in their interest expense. With many retailers closing a significant number of stores and also the various bankruptcies exhibited through 2024 so far, many orders that were expected never materialized.

With the combination of a still-elevated interest-rate environment, worldwide political unrest and the upcoming presidential election, apparel companies need to maintain a very nimble expense structure along with very lean inventory levels. We expect there will be opportunities for the financially strong apparel companies to acquire weaker entities as we move into 2025.

Sydnee Breuer

Executive Vice President and Western Regional Manager

Rosenthal & Rosenthal

 While there was general optimism going into 2024, overall consumer demand has proven to be weak in this first half. Despite gains in the stock market and seemingly good macroeconomic conditions, our clients’ sales data have not reflected that. Continued pressure on operating expenses with increased labor costs, high interest rates, increasing prices of raw materials and, most recently, rising shipping costs—again!—magnifies a decline in sales.

We continue to advise our clients to be more conservative with inventory purchases; however, overly optimistic projections have resulted in higher-than-needed inventory levels. Ultimately, it’s better to have a leaner inventory than to have too much. Furthermore, it’s better to get rid of older inventory even if at a discount than to hope demand rebounds as there are added costs associated with holding on to older inventory that need to be factored in. The liquidity generated by selling the idle inventory can be better utilized for other business purposes or to capitalize on opportunities should any arise.

It’s also crucial to contain operating expenses in this current environment. The Fed continues to discuss future interest-rate reductions, but it can’t be counted on until it’s announced.

It’s okay to be cautiously optimistic for the second half, but be sure you can pivot should consumer demand remain weak.

Tae K. Chung

   Senior Vice President, Business Development

Republic Business Credit

 Due to high inflation and interest rates combined with lower-than-expected consumer demand across the apparel market, the key to success this year is staying as lean as possible. There are a few ways to accomplish this goal.

I recommend that apparel manufacturers keep their inventory manageable and avoid overbuying while demand continues to drag. While we can’t anticipate when consumer demand will return to comfortable levels, manufacturers can cut their initial costs by closely monitoring buyer trends and managing their inventory accordingly.

Additionally, strengthening partnerships and communication channels with suppliers, retailers and technology partners can help businesses to effectively manage challenges through the second half of the year and create more-positive operating leverage. Understanding expectations and anticipating issues can avoid unwanted returns and refunds that could negatively affect a business’s bottom line while maintaining efficiency throughout the supply chain.

Lastly, I always recommend companies focus on vertical integration and introduce optimized software systems to improve productivity and reduce unnecessary overhead. There are always new ways to streamline processes and avoid redundancy, and finding the right solution for your company can greatly reduce costs through the end of the year and beyond.

Eric Fisch

Head of Retail and Apparel, U.S. Commercial Banking

HSBC Bank USA N.A.

Industry headwinds continue in 2024 due to inflation, consumer confidence and geopolitical concerns. Despite that backdrop, many of our clients have thrived and see positive trends for the second half. While each situation is unique, a few common themes carry through those that are seeing success.

Inventory Discipline. Nearly every one of our clients has reduced inventory year over year, and, in many cases, they have done it while growing the business. Tighter inventory levels improve margins, cut warehouse expenses and free up liquidity to pay down higher interest-rate debt. Cutting too much can impact sales, but finding how close they can get to that tipping point is a general trend of 2024.

Reevaluating Channels. We work with several brands that are taking the time to relook at channels they previously deemphasized. Whether it’s a wholesale brand looking to open its first store or vice versa, challenging times force flexibility. It’s important to not get too stuck in the decisions of years past and approach it fresh as dynamics shift.

Commercial Applications of AI. Many brands are beginning to find practical uses for artificial intelligence that move past the theoretical. Plain-spoken customer service, design and photo-shoot assistance, and customer-data analysis are some of the areas where I am hearing clients seeing immediate benefits. The use of AI feels akin to the early days of e-commerce, where first movers will see a demonstrable advantage. Many of the third-party software solutions are easy to implement and are relatively low cost initially.

   Rosario Jáuregui

   Senior Vice President, New Business

   Merchant Financial Group

 Manufacturers are seeing the benefits of the positive changes they implemented in 2023, which has had an encouraging impact in early 2024. They should remain diligent in keeping inventory levels lean and current and reducing overhead as needed while maintaining a high level of efficiency. Owners and CEOs are already multitasking many duties to remain relevant in an ever-changing market driven by technology and innovation.

Industry professionals are resilient, even now navigating the constant supply-chain challenges more effectively as well as a turbulent retail climate. Businesses must continue to service their customers’ demands by offering sustainability and on-time delivery while continuing to make their products attractive for online shoppers and techno-savvy consumers.

It is essential for manufacturers to continue staying focused on their forecast and business plan if they want to achieve their desired goal of profitability. Staying with the right financial partner and advisers will also allow them to navigate wisely and get the right advice during these challenging times.

It is our hope that manufacturers may benefit from a possible Federal Reserve cut of the interest rate in late 2024, but we cannot be fully certain. 2023 was an extremely challenging year for many, and apparel businesses seem to have adapted properly to the changing and difficult times. We have seen a smarter and savvier business owner and, so far, a much better 2024 for many. We believe this trend will continue.

Richard H. Kwon

Executive Vice President, Portfolio Manager

Finance One, Inc.

 With higher interest rates, weaker demand and a slowing economy, small apparel companies are struggling to invest during these uncertain times. However, as inflation and the job market cool, expectations are rising for the Federal Reserve to cut interest rates as early as September, provided prices continue to drop. Lower rates will make borrowing more affordable, encouraging increased spending and investment. For an apparel company to benefit in such a favorable scenario, it must acknowledge and address current challenges while keeping up with industry trends.

Geopolitical events and U.S.-China tensions have exposed supply-chain vulnerabilities. Shipping delays, soaring freight costs and tariffs on Chinese imports are hurting apparel companies’ reputation and profitability. Shifting some production to nearshore locations can reduce freight costs and delivery times, protecting margins and enabling quicker responses to consumer preferences.

As mobile and social-media commerce grow, apparel companies with e-commerce platforms should focus on their target groups when planning digital marketing campaigns. The rise of online fast-fashion disruptors offering real-time trends at competitive prices challenges traditional stores and other online retailers. Department stores are losing relevance due to their failure to evolve and compete with big-box stores that offer a wider range of products.

Lastly, as pressure builds for more socially and environmentally responsible products with transparent supply chains, apparel companies that lag in investing in sustainable sourcing will find themselves misaligned with both consumer and regulatory demands. Although these initiatives are complex and expensive to implement, postponing them will not be a viable option for long.

   Dave M. Reza

   Senior Vice President, Western Region

   Milberg Factors, Inc.

 Earlier this year we were focused on inflation and the likelihood of rate cuts by the Fed. Given the economic uncertainty at the start of this year, our recommendations were to exercise caution and to temper expectations about order and sales activity.

We have passed the mid-year point. Retail sales were up slightly YOY, but results for June were trending below last year. Aside from trying to stay ahead of fashion trends, apparel executives deal with cybersecurity, product sustainability, a nervous consumer, political and production risk, and rising shipping costs. On top of these challenges, everyone is trying to understand what AI will mean for the industry.

On a macro level, the apparel sector still faces headwinds fueled by inflation and high interest rates. Consumers are still grappling with elevated housing and food costs. The upcoming presidential, congressional and state elections will also influence consumer confidence.

Feedback from apparel-company owners, lenders and factors reflects continuing soft-order activity from retailers. Given that sentiment, it’s hard to recommend any aggressive growth strategy aside from making sure inventory and expense levels are being well managed.

With respect to the question posed here, our clients are not soliciting our recommendations on how to deal with macroeconomic and industry challenges. As lenders, our consultative role is more about sharing strategies that were successfully employed by peers to address or avoid similar business problems.

Kevin Sullivan

Managing Director, Western Region Manager

Wells Fargo Commercial Services

 We’re continuing to operate in an environment where consumers are spending more heavily on experiences and travel than they are on consumer products and apparel specifically. The consumer also appears to have moved more toward down-market purchases as increasing credit-card debt remains a concern. Geopolitical concerns also create uncertainty in the mind of consumers, who appear to have shifted to more of a mindset of buying what they need when they need it as opposed to spontaneous purchases.

The net impact for apparel companies has been an increased focus on managing expenses and rightsizing inventories. With increased interest rates, companies have become much more focused on the increased costs associated with carrying inventory, so most have become keenly focused on SKU rationalization and making product to order as opposed to carrying larger inventories. Freight costs are again beginning to increase due to global conflicts, which are causing some to shift sources of production. Fortunately, the apparel industry has proven to once again be very resilient and adaptable to any changes that the industry has encountered, but there’s little doubt that companies will need to remain vigilant given the continued economic headwinds for the remainder of 2024.

   Kenneth L. Wengrod

   Managing Member

   Stealth Management Group, LLC

 Adaptability is paramount in 2024 for U.S. apparel makers to navigate dynamic market conditions. Leveraging successful strategies from the first half of the year and addressing emerging opportunities and challenges can position them for sustained growth.

The successful strategies in the first half of 2024:

Cost Management. Implementing lean manufacturing and optimizing supply chains to reduce costs and improve efficiency with a focus on environmental sustainability.

Digital Transformation. Investing in e-commerce and digital marketing to expand the online customer base and optimizing inventory management.

Market Research. Exploring export markets and understanding cultural nuances in purchasing habits, color preferences and design trends.

The approach for the second half of 2024:

Leverage the Weak Dollar. Expand export sales by targeting high-potential markets like the EU, Japan and South Korea, making U.S. apparel more competitive internationally. Expand into emerging markets in Latin America, the Middle East and Africa, where growing middle classes and consumer spending present opportunities; respectively, Brazil, Mexico and Argentina; the UAE and Saudi Arabia; and Kenya, South Africa and Nigeria.

Adapt Culturally. Tailor products to regional preferences in color, sizing and design.

Utilize U.S. Commercial Services. Leverage the U.S. Commercial Services’ Gold Key program to vet foreign customers by region to help identify reliable partners.

By focusing on these strategies, U.S. apparel makers can effectively navigate challenges and capitalize on opportunities in the evolving global landscape. Understanding and adapting to cultural nuances in export markets will be crucial to success.

Responses have been edited for clarity and space.