INDUSTRY FOCUS: FINANCE, In the Midst of COVID-19, U.S. Businesses Take It One Day at a Time

At the beginning of July, the United States Bureau of Labor Statistics reported that June…

At the beginning of July, the United States Bureau of Labor Statistics reported that June unemployment in the country fell to 11.1 percent from 13.3 percent in May, with employment in sectors including retail rising to 4.8 million following businesses reopening in many parts of the country. Recently, local governments in certain areas that have seen rising COVID-19 cases are rolling back their reopening plans, with businesses that serve particular sectors being forced to close again.

In response to the unique climate, we asked finance-industry experts, “What do you foresee happening in the apparel business over the second half of the year now that certain areas of the United States have opened while others are forced to stall their retail and nonessential services?”Darrin Beer, Western Regional Manager, Commercial Services, CIT

While overall retail sales in June improved 7.5 percent over the prior month, it appears most of the momentum will subside in certain geographies as COVID-19 cases are on the rise. Several larger states, including California, may hit pause on plans to reopen, and consumers may once again navigate toward more online purchasing. While many shoppers during the crisis have expanded online shopping, it’s apparent that when bricks-and-mortar stores began opening, apparel sales improved.

I believe we are at a critical juncture, and the coming weeks will be important in determining the impact on apparel sales in the third and fourth quarters. Based on the rebound in sales during May and June, you may conclude there is pent-up demand to shop even with certain COVID-19 restrictions. If the coronavirus cases subside, there could be a further rebound in retail sales during the second half of the year. Inventory management will be extremely important and tricky going forward as businesses want to maximize available sales while avoiding unsold apparel due to seasonal changes and the uncertain shifts of the virus response efforts.

Apparel manufacturers have been through quite a bit of turmoil the last couple years between tariffs and now the virus. Hopefully, active cases decline and, better yet, a vaccine is developed soon to get employment and the overall economy back on track.

Mark Bienstock, Managing Director, Express Trade Capital

The COVID-19 environment is fluid, to say the least. This pandemic has evolved into a geographic-region problem in particular. This relates to the apparel business in the same manner.

Those stores that closed in the Northeast early on have now partially reopened. The states that were initially not affected are experiencing similar store-closing issues now and are dealing with very confusing state, local and federal guidelines. This translates beneficially back to those stores that have significant e-commerce capabilities. Those retailers will be the survivors through this tragic situation. However, there still is such pent-up demand for the traditional shopping experience that we believe many of the well-established discount chain stores will benefit as they adjust the shopping experience to fit the ever-changing landscape.

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Sydnee Breuer, Executive Vice President, Western Region Manager, Rosenthal & Rosenthal

Few industries, regions or companies have been immune to the impacts of COVID-19, and the apparel sector has been no exception. Early on in the pandemic, retail was dealt a tough blow, with retail purchases hitting their lowest mark in eight years this spring and apparel prices seeing their largest monthly drop in years. Brands scrambled to offload seasonal inventory, shifted from wholesale to direct-to-consumer sales and found creative ways to supplement their product lines. We’ve seen brands shift their manufacturing operations to make much-needed masks and other PPE products, while others are entirely rethinking their product lines to focus on in-demand casual and work-from-home apparel. All of these smart maneuvers and tactics have helped many brands fill the void while bricks-and-mortar retail continues to shrink, especially as so many states are tightening up again in response to COVID-19 spikes.

These new and unique opportunities have also created new and different funding and financing needs. The brands that were able to pivot their businesses to meet rising demand for PPE ran into hurdles along the way when they realized they needed cash to quickly convert their product operations or import materials from overseas. And while there were many companies that were able to rely on modified production lines or e-commerce channels to close the gap, others struggled to make that transition. With so much competition in the apparel sector already, not every company has the resources to rapidly shift production or overhaul an e-commerce sales platform on the turn of a dime. Add inventory issues to the mix, especially after some retailers canceled orders this spring, and companies were left with outdated, off-season and deeply discounted product.

All of these new challenges have forced brands to more regularly reevaluate their balance sheets, income statement, forecasting models and financing solutions. Forecasting demand will be more difficult in the weeks and months ahead as states experiment with reopening and tightening back up again, so managing and maintaining an appropriate mix of inventory will be key. Companies will also need to keep a close eye on cash-flow management and put the right cost controls in place to keep their budgets in check. Diversification will be especially important for companies as they look to reach customers in different regions. Companies will need to plan accordingly to allocate resources and get product to the places where they can easily be sold and bought in this fluid environment. Recent data from First Insight noted that while consumers seem ready to buy apparel in stores, safety concerns still remain. Most were concerned about trying on clothes in dressing rooms, and 66 percent said they did not feel safe working with a sales associate. Given these challenges, along with the uptick in retail bankruptcies and store closures, credit protection should be the number-one priority for apparel brands right now.

Partnering with an experienced factor can help brands minimize bad debt when selling into larger retailers, big-box stores or specialty shops when they are unsure of their creditworthiness—and the potential for creditworthiness to deteriorate quickly. Over the past few months, we’ve seen a major uptick in factoring inquiries as companies are looking not only for much-needed credit protection but also back-office support so their management teams can focus their attention on running and growing their business in such a challenging environment. Ultimately, to survive and thrive in this climate, apparel brands will have to get creative, remain flexible, stay on top of trends and styles, and really take the time to understand their customers’ shifting needs.

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Eric Fisch, Senior Vice President, National Sector Head, Retail and Apparel, HSBC Bank USA N.A.

The second half of the year presents a host of challenges for the retail sector. The overarching risks associated with a resurgence of COVID-19 and any potential lockdowns will be the main factor in the success of the industry. Setting this overarching issue to the side, a number of factors will contribute to any individual company’s success for the rest of 2020.

One thing to remember is that in many categories within retail lead times for production are quite long and therefore decisions on inventory levels and product assortment for Fall and Holiday were made in April and May at the depths of the global lockdowns. This will result in a more-limited assortment and quantities as wholesalers and retailers bought conservatively not knowing what the market would look like. For those companies who are managing to these lower levels, it will result in a lackluster year at best but will avert the risk of a disastrous second half with a glut of product.

For others who have an ability to quickly produce additional product in season to meet unexpected demand, it could present an opportunity and a differentiation from competitors. Ultimately, what has become clear is that the companies with significant liquidity and conservative capital structures are best positioned to manage through any additional elements of the crisis and stand to come away stronger and with opportunities to increase market share from those who do not survive.

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Joshua Goodhart, Executive Vice President and National Sales Manager, Merchant Financial Group

These are challenging times, but I do believe that apparel businesses are learning how to navigate and adjust to this new environment. COVID-19 cases are picking up in many parts of the country, but I do not foresee a mandatory shutdown of the same magnitude as we had in March, April and early May.

I believe retailers and wholesalers are still navigating figuring out the best ways to sell and produce their product and get them to the public. Each month since April we have seen improvement. Many apparel wholesalers have been able to develop some form of online direct-to-consumer presence to help support growth and cash flow. Finance companies are learning how to better service and finance these online platforms to provide more cash flow for the growing apparel business.

We have to remember that, although COVID-19 is restrictive to some degree, the public still needs clothes and accessories for the changing seasons to be available. Some businesses have brought furloughed employees back but are still maintaining a much lower overhead than they had before the COVID-19 pandemic. In addition, this is a world pandemic, and there are struggles not only in the U.S. but overseas as well. Suppliers overseas seem to be more willing to work with U.S manufacturers on payment plans and extended terms in order to keep the train moving along.

My overall feeling for the second half of 2020 is cautiously optimistic. I believe there will still be monthly improvement for the apparel industry as more and more businesses adapt to the new normal. Apparel wholesalers will continue to rely on low overheads and a more-digital work structure. Wholesalers will have to cope with shrinking volume but hopefully make up for it with better margins. The biggest challenge will clearly be in the retail sector with many retailers continuing to struggle to survive if people can’t visit the stores.

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

For apparel manufacturers and importers, the second half of the year is still very fluid. It is anybody’s guess when COVID-19 will be contained. It looked promising about a month ago when states began to reopen, but with the surge in the virus many states have taken significant steps backward as the amount of positive COVID-19 cases keeps increasing. Stores and malls that were open are now being asked to close again. While shelter-in-place has not yet been declared, that is also a possibility if COVID-19 continues to surge.

What I have seen during this pandemic is that manufacturers and importers who have either their own e-commerce revenues or who sell to large e-commerce retailers have performed better in terms of sale revenues being generated than companies where the majority of their customers are primarily bricks-and-mortar stores. The traditional retail-store channels have been hit hard during the pandemic, more so than the e-commerce retailers.

While traditional retail has opened for some, it remains to be seen how much credit the apparel manufacturers and importers will be able to get credit approvals from their factor or credit-insurance companies. One of the consequences of this economic environment is that many large retailers have needed additional dating to pay for the goods they purchased. In other words, they have been deferring their payments for up to 90 days past the due date of their invoices. This, in turn, has caused credit problems for many retailers. If credit is withheld or reduced, then the burden falls on the apparel companies to hold the products, negotiate new terms or even ship at their own risk if all else fails.

I think under the best-case scenario, assuming COVID-19 doesn’t get any worse, during the third quarter business will start to pick up with new orders forthcoming. If COVID-19 is still surging, I don’t know how holiday 2020 can be anything but lackluster.

People need to get back to their jobs and start earning again. If this doesn’t happen and unemployment stays in the double-digit range, I don’t foresee any significant spending for holiday 2020.

We need a lot of good things to happen to make sure the economy keeps moving forward so people can get back to work, the unemployment numbers start to decrease, and the country feels safe and secure that COVID-19 is not a danger to us.

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Kee H. Kim, President and CEO, Finance One, Inc.

While a V-shaped recovery of the U.S. economy was expected with various federal-government relief measures in the stimulus package, the resurgence of COVID-19 across the country in recent weeks has shifted views to a slower, W-shaped recovery. Despite improvements in employment and retail sales during May and June, we see a significant headwind in the coming months. Household discretionary spending such as on apparel can experience additional pullback without government support in the second half of 2020.

In our space, we are witnessing credit reductions and withdrawals of various retail and wholesale buyers on a daily basis due to increasing delinquencies and losses. Certain major retail buyers are extending payment terms by as much as an additional 90 days, adding significant pressure on the supply chain. In these cases, the suppliers, in consultation with their factors or insurance companies, should negotiate with their buyers to extend the payment terms as little as possible. With already 21 major retailers filing for bankruptcy in 2020 so far and more in the coming months, apparel manufacturers and importers should reevaluate their risk tolerance on buyers who are not credit approved by factors or insurance companies.

We are in unprecedented times. Most businesses are in self-preservation mode until COVID-19 is eradicated through a successful vaccine. Every apparel business should evaluate its liquidity, sustainability of sales, stability of buyers and suppliers, workforce, and safe working environment. In today’s challenging credit environment, it’s prudent to keep your lender apprised diligently of your changing business trends and specific headwinds you face. This will alleviate any shock or retraction by the lender and result in better understanding and support to your business during this uncertain time.

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Robert Meyers, President, Republic Business Credit, LLC

Republic feels a tremendous amount of respect for and will always be aligned with the entrepreneurs of the apparel industry. The challenges in the second half of the year will likely mirror the challenges already faced, including extended payments, canceled orders, delayed shipments and margin pressure. While those are the likely challenges, they will be much less of a surprise this time around, and planning can make all the difference. Additionally, we expect more product opportunities, PPE needs, and a continuing need for remote and work-from-home apparel.

While I am not confident there will be another round of PPP funding, there are several conversations about support of some kind. The resilience and perseverance of our industry will be told for years to come after this pandemic. Good luck to all of our friends and partners during this prolonged storm, and we will continue to support you no matter the economic environment.

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David M. Reza, Senior Vice President Western Region, Milberg Factors, Inc.

June retail sales rebounded in many regions as states emerged from lockdowns. The same surge helped to reduce unemployment claims, which, while down from their peak, are still at historical weekly highs when compared with any other period in recent history. Apparel sales benefited from the pent-up demand created by mass home lockdowns, especially in large urban areas, during the spring.

Factors are seeing increased client sales volume as compared with March through May. Apparel makers are booking future business for fall delivery. While these developments are positive, overall apparel sales are still well below pre-COVID levels.

Despite the positive news in June, our GDP is still contracting and was estimated to have declined over 10 percent in Q2 vs. Q1. Also, while the growth in June was significant for apparel and other consumer products, the base in May was at a low bar. E-commerce activity remains strong and was up substantially. It’s a trend that will continue as more shoppers stay home either by choice or government mandate.

For the remainder of 2020, the forecast is still uncertain and fluid due to the uncontained ebb and flow of infections. In Southern California, infections are rising and there is a possibility of another lockdown. The Sunbelt and Southwest are reporting record cases. The impact of the federal government’s pandemic support programs for the unemployed and small business will either soon expire or have already been felt.

Continued surges of infections in some states will negatively impact consumer optimism and demand. Businesses may be compelled to again shutter in some states and municipalities. The likely scenario is that—short of a vaccine becoming widely available in 2020—a W pattern will emerge in the recovery that will have a dampening impact on all retail sectors including apparel over the coming months.

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Kevin Sullivan, Executive Vice President, Western Region Manager, Wells Fargo

The short answer is that it’s frankly very difficult for anyone to predict what the back half of the year will look like in apparel. We’re in uncharted waters right now, and the many variables associated with COVID-19 make any projections more than six to eight weeks out pretty challenging.

What we do know is that sales at retail in general spiked around 25 percent when stores initially opened, which enabled most of our clients to again begin shipping product at a healthy pace. Vendors who were initially advised that shipments for Spring ’20 would need to actually be held for Spring ’21 were pleasantly surprised when major retailers began calling those goods out for immediate delivery, so, in the beginning phases of the reopening, most apparel companies were pleased by the initial sales level.

As it became clear that there would need to be a certain amount of retrenchment as COVID cases began to spike again, many have seen retail sales drop off as the consumer reassesses the safety of shopping on-site. Certainly clients with a well-developed direct-to-consumer channel have done better than most, and clients dealing in casual athletic apparel have done reasonably well based upon work-from-home strategies for many companies. Some have also shifted to producing PPE, which has helped offset lost sales in other areas.

The unemployment rate remains a concern as many companies across various industry sectors admit that they may not be able to hire back workers who were previously laid off, citing the significant uncertainties ahead. While our clients in the apparel industry have done an exceptional job adjusting to these new realities, most do see sales decreases for 2020 in the 25 to 30 percent range. The goal is to create as many new efficiencies as possible in an effort to get through 2020 in the hope that a vaccine will be available in time to allow for a healthy 2021.

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Ken Wengrod, Co-founder and President, FTC Commercial Corp.

The apparel industry will continue to be significantly impacted by the COVID-19 effect. This harrowing pandemic may force the cleansing of manufacturers and retailers who have not truly established the loyalty of the ultimate customer—the consumer. Such a cleanse may be fitting in an overcrowded industry saturated with manufacturers producing tiresome monotony.

The savvy importers and manufacturers have been addressing their operations in terms of in-bound logistics including reevaluating their supply chain and shifting production from China or the Far East to the United States or Latin America. In turn, they’ll be able to maximize the value of the newly implemented USMCA Agreement. Chinese labor prices are at par with Mexican labor prices. The USMCA should give a boost to near- and in-shoring not only due to labor prices but also shorter lead times and electricity costs. Our region has some of the lowest electricity costs in the world, including China. U.S. importers and manufacturers may continue to divest their supplier network and attempt to reduce any concentration of suppliers that could create a future bottleneck. U.S. importers and manufacturers may be looking to also further diversify their customer base with strong emphasis on exporting. Ninety-five percent of potential customers are outside of our boundaries. There will be a further need to review their product line and consider the concept of repurposing their operations.

The COVID-19 effect will be long lasting and will go beyond the concept of wearing masks. Development of nano-textiles, not only for wicking and anti-bacterial impacts but for temperature control, might increase. It’s highly likely that technology will drive these areas of change. The COVID-19 effect is just starting to impact the apparel industry and washing out those marginal businesses. Innovation with an agile mentality will be a way of thinking. In the past, large operations had a distinct advantage over the smaller to medium-sized enterprises; today, the smaller well-run operations that are not hampered with excess overhead and inventory will flourish. Retailers may be establishing and maintaining consumer loyalty and delivering merchandise to consumers with rapid speed and proper execution by promoting their online services. Importers and manufacturers will also be focusing on creating and expanding their own direct-to-consumer programs. Consumers may continue to search for comfort, value, and authentic and sustainable merchandise. Going forward, consumers will be very selective in their buys.