As business restrictions stemming from COVID-19 continue to ease across the United States and unemployment has fallen into the single digits at 8.4 percent, yet employment remains at 11.5 million jobs below February’s figures, and the gross domestic product in the country also decreased at an annual rate of 31.7 percent during the second quarter.
During this third quarter of 2020, the country is also experiencing its share of natural disasters and threatening weather. Destructive wildfires have decimated millions of acres in the Western region. As hurricane season enters its final few months, Southern states and those along the Eastern seaboard also must prepare for the worst while hoping for the best.
Considering the condition of the United States economy, emergency relief and the loss of typical back-to-school revenue for this year, California Apparel News asked finance-industry experts: How should the apparel industry approach the final quarter of the year as we enter the holiday season?
Darrin Beer, Western Regional Manager, Commercial Services, CIT
While we have seen a positive increase in the recent employment figures, millions remain unemployed, which ultimately impacts discretionary spending. The $600 per week of enhanced unemployment benefits ended July 31, placing a further strain on households. Apparel manufacturers have had a difficult time navigating through back-to-school as parents and students were faced with the likelihood of remote studies from home. Some spending went toward desks and related accessories and electronics such as computers and laptops. Spending on clothing was concentrated online, with consumers favoring comfort and athleisure while studying and working from home.
Retailers are countering the decline in traffic by emphasizing online sales and curbside or in-store pickup. In some instances, the manufacturer is being asked by the retailer to support its online strategy by shipping to the consumer directly and then billing the retailer. In this case, the manufacturer is asked to carry several SKUs and incur all the handling costs related to servicing individual customer orders purchased on the retailer’s website. Investing in technology and processes will not only help service immediate orders, but it can also improve a brand’s own digital strategy.
It’s hard to predict the status of store reopenings during the fourth quarter. Given the level of uncertainty, retailers will likely play it safe for the holiday season by ordering cautiously and taking fewer risks. When COVID-19 is under control, I believe more consumers will resume shopping at bricks-and-mortar stores, and apparel sales will improve over prior months. We may even see a burst of pent-up demand for shopping as people get out of their homes after a long period of isolation. Of course, this activity will depend upon economic factors including employment rates and household incomes. Until then, expense and inventory management are critical while focusing on internal processes and efficiencies.
Mark Bienstock, Managing Director, Express Trade Capital
As we all are aware, apparel at the retail level has been one of the hardest-hit categories. The number of bankruptcies related to apparel appear to lead the charge. The most efficient way for apparel manufacturers to handle this crisis is to create a virtual-showroom platform along with emphasizing their ability to sell through the various e-commerce platforms. In addition, only those well-capitalized companies or companies that have a longstanding relationship with overseas factories that can provide open credit will be the long-term survivors.
Sydnee Breuer, Executive Vice President, Western Region Manager, Rosenthal & Rosenthal
While the economy remains challenged and inconsistent at best, the artificial stimuli (PPP and EIDL loans, extra unemployment benefits and the like) have certainly kept consumer spending up. It may not be on the trajectory expected pre-COVID-19, but the apparel industry has had some time to adapt and readjust its designs and factory orders, and that has made a difference.
The challenges facing the industry are still very much geographic, with certain parts of the country fully open and others still experiencing a significant level of shutdown. But there are some bright spots, especially among companies that have invested in their own e-commerce platforms and have sold to stores that also sell essential products.
The key to success in the apparel industry as we head into Q4 (as well as with other industries) is being as flexible and as nimble as possible. Inventory levels and expenses must be in line with a likely unpredictable and/or inconsistent holiday sales season. When you do get an order, you need to be sure the retailer will be able to pay the invoice when it’s due. With the number of retail bankruptcies on the rise, you’d be wise to have a factor or credit-insurance coverage in place to help mitigate your risk. But most important of all, stay safe and know we will get through this!
Gino Clark, Executive Vice President and Managing Director of Originations, White Oak Commercial Finance, LLC
At White Oak, we believe the apparel industry should focus on the basics while keeping expenses and inventories down. Being resourceful in daily business decisions is essential as we’ve watched companies of varying sizes maintain a conservative expense structure while adapting to a virtual model to meet their clients’ needs in an unprecedented market. It is this type of creativity and discipline that will be critical during the holiday season.
Understanding counterparty risk is critical across industries, and it is acutely important for the apparel sector. We strongly encourage our clients to expand their sourcing and develop strategies to navigate counterparty risk as bankruptcy announcements continue to be prevalent.
Knowing your trade cycle and its impact on liquidity will return near and long-term results, especially as retailers are demanding increased terms, so verify that your lender will support corresponding increases in customer concentration and working-capital requirements to keep operations flowing and to provide room to pivot as needed.
Last and most importantly, we recommend that apparel businesses keep clear and consistent communications with their customers, employees, accountants, suppliers and industry network. Listen to what is happening in the marketplace, vet and adopt successful trends, reach out to your business community, CPA and lender for support, and be a constructive resource to fellow business owners as we are all in this together.
Eric Fisch, Senior Vice President, National Sector Head, Retail and Apparel, HSBC Bank USA N.A.
While the pandemic and economic situation have created significant uncertainty, the past six months have begun to provide salient trends that are valuable for retail and apparel businesses to use as guides for the coming season. While spending is down year over year, it has rebounded as consumers develop a routine. This new normal comes with changes in lifestyle and what clothing consumers need, therefore altering product demand.
A shift from formalwear to athleisure and a shift in channel preference to online from bricks-and-mortar are two stark examples. Additionally, within each category we have seen more-nuanced changes in consumer preference, but enough time has elapsed to begin seeing consistency. Using this data to plan for the fourth quarter and holidays is the best bet for being prepared. Even with a clear plan, conservatism will continue to prevail, which will make it difficult for anyone to show a truly outstanding performance while also protecting against significant excess inventory.
Ronald S. Friedman, Partner, Marcum LLP
The U.S. economy is expected to have a nice increase during the fourth quarter. I have heard estimates ranging from 20 percent to 35 percent growth over the third quarter. With these optimistic projections, manufacturers need to be ready to meet the needs of their customers, but caution is required. I would not recommend stocking up on inventory to meet the demands. Stick with what has been working in the past, buy inventory against orders, and don’t speculate.
Many of our clients at Marcum are seeing that, with lower staff levels, the businesses are operating just fine. As sales begin to increase, there is no need to expand the overhead to pre-COVID-19 levels. This will be the new business model going forward. Apparel companies should not need to hit pre-COVID-19 sales levels to be profitable.
Rob Greenspan, President and Chief Executive, Greenspan Consult, Inc.
The apparel industry should approach the fourth quarter and holiday season with great caution. We have to remember we are still in the middle of this pandemic. While some of the economic metrics have improved, they are compared to probably all-time lows. We still have not fully opened up the economy, and many states are still suffering COVID-19 setbacks. Some states are still in Phase 1 of reopening. Any kind of COVID-19 outbreaks could lead to setbacks. So everyone must be cautious and not bullish that it is business as usual.
There are still retailers who continue to struggle financially. I don’t believe we have seen the last of the retail bankruptcies. We should not be surprised if other major retailers turn to the bankruptcy courts for protection. Even if it’s not bankruptcy, many retailers will have trouble getting their credit approved for wholesale orders. During the pandemic, retailers received extended-payment terms, and slow pay by retailers does not help the situation. Manufacturers and importers might likely have to assume their customers’ credit on their own.
Optimistically thinking, I am hopeful retailers will need holiday merchandise to stock their shelves. Optimistically thinking, I am hopeful there will be pent-up demand by consumers to spend money for the 2020 holiday season. People are looking for reasons to get out, resume some form of normalcy in their daily lives and have a good holiday season.
As for the apparel industry, manufacturers and importers should be cautious and careful in their inventory purchases. I would recommend as little speculation as possible on inventory buys. I would try to get my customers’ credit approved by the factor or through credit insurance so the sellers don’t have the bad-debt risk of their customers’ inability to pay. I recommend keeping the overhead as low as practical. Apparel manufacturers and importers need to be flexible and, of course, as liquid as possible in case the pandemic grows again instead of retreating.
Richard H. Kwon, Executive Vice President and Portfolio Manager, Finance One, Inc.
The 1.4 million new jobs added in August include nearly 240,000 temporary workers the government has hired to conduct the 2020 Census. In addition, the slowing job growth (June: 4.8 million, July: 1.7 million) is an indication that businesses remain wary of broader economic recovery.
With weaker apparel sales this back-to-school season affected by remote learning, social distancing and the expiration of government stimulus across the country, the apparel industry would need to rely on the upcoming Q4 holiday season to make up revenue lost during Q1 and Q2’s pandemic-induced shutdowns. With already 27 major retailers filing for bankruptcies so far this year, the competition among the retailers to stay in business is expected to be fierce. Retailers may opt to offer earlier and steeper discounts and markdowns compared to prior holiday seasons. Apparel manufacturers’ profit margins may suffer as a result without careful planning and execution.
Opportunities exist for apparel companies that take actions to transform themselves and meet shifting consumer demands. Some companies found success by pivoting away from fast-fashion or formal/business attire to more comfort-oriented, athleisure or loungewear product lines. Others have permanently added personal protective equipment to their inventory and improved sales. Still, with so many uncertainties as COVID-19 rages on across the country and around the world, apparel companies that can best manage their liquidity, inventory, competitive pricing and trade-credit risks should survive through the pandemic and thrive.
Robert Meyers, President, Republic Business Credit, LLC
Performance, discipline and persistence continue to be our advice for apparel entrepreneurs as they enter the holiday season. Performance across your supply chains, quality control and delivering early on any shipment. As supply significantly outpaces demand, retailers will seek any excuse to take a discount or a return. As an entrepreneur, you will need the discipline to keep your team focused on your strengths and being very thoughtful about which business you should sell. There will be marginal credit decisions or extended-term orders. Make sure you are working with your factoring company or bank to provide the certainty that payment is guaranteed.
Lastly, persistence will be essential as there will be more uncertainty and less predictability than ever before. If a vaccine emerges in November, people no longer socially distance or if a second wave takes hold, it will drastically change the supply chain this holiday season.
While performance, discipline and persistence are essential on the wholesale side, they are equally important for e-commerce strategies. Demand for e-commerce continues to build, creating a lot of opportunities for the apparel industry as it navigates the balance between wholesale and direct to consumer. We advise our clients to approach each week with the perspective and understanding of what they can do in the environment and make sure their supportive financing partner is prepared for the unplanned holiday season.
David M. Reza, Senior Vice President, Western Region, Milberg Factors, Inc.
The U.S. economic outlook can be summed up in one word: uncertainty. The COVID-19 pandemic shows signs of abating in some areas, for example New York, while accelerating in others, for example the Northern Great Plains. In all states, infections vary from county to county with the reopening of schools, businesses and entertainment venues either on hold or slowly restarting subject to rapidly evolving public-health criteria.
Unemployment may be down from its record high, but it’s still an issue. Congress is stalled on an extension of benefit support. Natural disasters in the West and South have rendered many homeless just ahead of the winter months. The reality is that millions of citizens are grappling with bigger issues than holiday buying. Of course, there are exceptions—those people who are employed and have savings can afford to splurge with dollars saved from canceled vacations, no movies and less dining out. These dynamics, coupled with the related lack of consumer confidence, present a planning challenge for all businesses and are especially relevant to the apparel and retail industries.
Against this backdrop, a bullish attitude about Q4/holiday 2020 business is hard to support. Caution is certainly warranted as retailers will look to keep in-store inventories lean in response to limited or (shudder) no foot traffic. The pandemic has been a boon to online shopping in all categories, and 30 percent of sales are expected to be online this holiday season. If there is another series of lockdowns, this number will grow. It’s all the more reason for apparel wholesalers to invest in a robust e-commerce platform themselves.
For Q4, the industry needs to be attuned to five key issues. First, the guidance from its factoring resources on the financial condition of their customers. The pandemic has exacerbated the already-weak financials of many retailers. Second, the retailer’s strategy relative to how it manages the consumer’s in-store and online shopping and fulfillment experience. Third, sell-through data by customer and store so that wholesalers can build and ship the right inventory. Fourth, the holiday season will start earlier (Amazon Prime day) and last longer. Fifth, shipping capacity may become an issue in Q4—be prudent that late-season inventory buys and retail deliveries could be delayed due to capacity issues. Don’t get stuck with inventory or incur the risk of large returns and/or Q1 2021 markdown requests. In sum, all of the apparel industry has to be prepared for a different and likely difficult Q4/holiday 2020.
Ken Wengrod, Chair of Finance for the District Export Council of Southern California, appointed by the U.S. Secretary of Commerce
By now, it’s reasonable that apparel operators are addressing changing consumer-buying habits. Some owners of businesses have been withdrawing excess money from their companies to support their bourgeois lifestyles. Justifying their sense of entitlement in this unpredictable market seems to be a common theme among owners who have been around a long time. Hanging on to the low interest rate begs the question, How will they survive this year’s holiday season? Manufacturers will be going through a much-needed cleansing period that may represent a boon for apparel small to mid-size entities (SMEs), while the low interest rates will assist them with this growth.
Presently, consumers are operating remotely from their homes. COVID-19 has taught us to live with less, with more functional, comfortable and sustainable clothing. Consumers are still spending, but they are buys such as throwaway clothes, which negatively impact our environment. On a global front, people are maximizing every square inch of their living spaces. Modernizing living areas and updating communication/technology and fitness equipment have piqued consumers’ interests, which has affected the type of apparel they are purchasing.
Safer at home is the mantra. Consumers are conditioned to find ways to protect themselves while in continued isolation. Working and managing families and children on learning platforms has launched contactless buying. Virtual meetings, Telemedicine, Instacart, Amazon and curbside car loading for store purchases are the signs of the times. Adapting to our ever-changing world is critical. Those that haven’t been evolving may be forced to battle tough times as we approach the final quarter.
But where there’s turmoil there’s opportunity. Inevitably, these tumultuous times will open up significant opportunities for SMEs who have made the paradigm shift to the sudden demand of the virtual online economy. These SMEs recognize the playing field has been leveled and that they can compete with the so-called dinosaurs of the industry—touché! Today, authenticity, agility, transparency and knowing well the ultimate customer through data metrics breed the winning manufacturer. Hasta la vista to building excess inventory and wasting the opportunities of cheap money.
Maximizing productivity, properly utilizing technology, searching for ways to shorten trade cycles (including near- and in-shoring production), and cutting unnecessary sampling, design and sales costs are secrets to manufacturing success in the apparel world. Apparel manufacturers also need to focus on foreign markets to expand their customer base. Companies who’ve been able to adapt to these practices may have an opportunity to flourish through the holidays and over the next three years.