By: Glen Podhorzer


The economic meltdown is devastating the retail industry Apparel manufacturers and suppliers of apparel, footwear and accessories everywhere are also vulnerable. The author offers a wealth of guidance for manufacturers and importers that are seeking to survive the recession -and even emerge from it stronger.


On December 1, the National Bureau of Economic Research declared that the U.S. economy had entered a recession in December 2007. The announcement was anti-climatic, as the nation's retailers and suppliers of apparel and other consumer goods have known or suspected this for a long time. In fact, on December 4, 2008, it was widely reported that retail sales for November 2008 were the weakest in 35 years, with same store sales falling on average 2.7 percent vs. the same period last year.


However, department store sales were down 13.3 percent and specialty apparel retailers were off 10.4 percent. Double-digit declines were common, with one specialty apparel retailer reflecting a 28 percent decline in same store sales. Against the economic backdrop of the financial meltdown, credit crisis and drastic reductions in consumer spending, retailers and their suppliers face their greatest challenges in decades. In fact, several already have succumbed and filed for bankruptcy or are in the process of liquidating (i.e. Mervyns, Boscovs, Linens N' Things). Many more retailers are expected to file for bankruptcy early this year.


These conditions will continue to dramatically affect suppliers to these retailers, in particular suppliers of apparel, footwear and accessories. The realities of this recession will include:

  • Significant increases in bad debts and uncollectible accounts, negatively impacting cash flow;
  • Reduced consumer demand and spending, resulting in decreasing sales;
  • Reduced customer base and fewer doors to sell into;
  • Significant increase in markdown money and allowances retailers will demand to help mitigate weaker sales and increased markdowns at the retail level;
  • Increasing price and margin pressure as the retailer intensifies efforts to keep prices competitive and enticing to the consumer;
  • Inability to obtain additional financing or credit lines to help sustain operations and survive the recession, due to the credit tightening by lenders.


Faced with these conditions and challenges, what can the apparel manufacturer or importer do to improve the chances, not only of surviving the economic meltdown, but emerging stronger and more competitive when the recession comes to a close? The answer is plenty!


Unfortunately, owners of small and medium-sized businesses are often too caught up in the day to day operations to recognize or identify corrective action or steps that can be implemented from operations, financial and organizational perspectives. Therefore, it is more critical than ever that owners sharpen their focus on critical business components, and the company's operations and financials, to effectuate positive change to survive.


So what can the struggling apparel manufacturer or importer do? Here are some areas for consideration:


Inventory


Because inventory is such an important component of the apparel business, and likely the first or second largest asset on the company's balance sheet, failure to control it will virtually ensure business failure. Excess inventory has a direct and dramatic effect on margins, liquidity, overheads and overall profitability. Old, obsolete or excessive inventory levels must be eliminated or reduced to acceptable levels via improved systems or realistic plans to reduce inventory through sales and distribution channels.




 

 

While every leading economist believes we are experiencing a severe downturn, everyone expects that eventually a recovery will occur. When that recovery occurs is a subject for debate. In the meantime, this article outlines many survival ideas and considerations for apparel entity owners and managers.

However, here is the important theme to walk away with: owners and management must become proactive. Take important, business-sustaining action. Do not sit around doing business as usual while waiting for the recession to pass. Those who follow that path virtually guarantee that their company will have "passed" along with the recession.



Action steps include:

  • Development of a short and long-term plan of inventory liquidation to raise cash;
  • Improvements in systems for ordering inventory, including open-to-buy systems and reporting;
  • Improvements in forecasting sales, purchases and inventory, and procedures for continuous updating, in order to better control inventory levels;
  • Development of, or improvements in, aged inventory reporting, to better and more timely identify and then expedite, the closeout of old, slow-moving or obsolete SKUs.


Margins

  • Apparel suppliers will continue to experience intense margin pressure from retailers. In this economic climate, with dwindling sales, it is increasingly critical that suppliers do everything possible to maintain historical or reasonable margins, including:
  • Intensifying efforts to locate new sources of supply to obtain better pricing on finished goods or raw materials. Keep in mind, every other business is hurting and that provides significant opportunities to either negotiate better pricing with existing sources, or identify alternative sources of supply at lower costs;
  • Strengthening procedures and systems related to monitoring, controlling and collecting invalid or unauthorized deductions and chargebacks from retailers;
  • For importers, seeking out alternative freight carriers and shippers, reviewing shipping and consolidation procedures and reviewing duty rates and method of assessment to ensure most advantageous categories and least costly duty charges.


Overheads


In short, overheads must be reduced and restructured to support the current business model and sales projections. Owners of apparel companies will need to:

  • Identify potential cost reductions by reviewing the organization chart and job profiles;
  • Highlight and eliminate waste through a line-by-line review and analysis of operating expenses;
  • Significantly reduce discretionary spending on line items such '3S advertising, trade show costs, travel, etc.
  • Reduce or eliminate annual salary increases and bonuses; and
  • Institute a disciplined budgeting system, with monthly reporting and monitoring of actual costs to budget.


Bad Debts


It is inevitable that many more bankruptcy filings will occur during this recession. A large bankruptcy can have a catastrophic effect on many apparel suppliers, especially small and medium-sized companies, or suppliers with a concentration in a few customers.


 

To mitigate some of this risk, companies may consider:

  • Entering into a factoring arrangement, on a non-notification basis, to "insure" against losses from bad debts by transferring the risk of loss from the company to the factor. While these arrangements may be costly, they must be weighed against the cost of one or two large bad debts, which could strangle the company's cash flow and its ability to sustain operations,
  • Stepping up internal collection efforts, and improving credit monitoring procedures, to avoid selling to retailers in significant financial difficulties, posing a high degree of risk of loss.


Product Lines/ Brands


It is not unusual for specific product lines or brands to operate at a loss, thereby negatively impacting the overall company profitability. During this period, survival may depend on shedding losing product lines or brands to improve profitability or minimize losses. Apparel suppliers should:

  • Ensure internal reporting systems are in place to accurately account for profitability by product line or brand;
  • Eliminate losing product lines or brands if they provide little or no "contribution to overhead;"
  • Review all licensing arrangements and consider renegotiating with licensors to reduce minimums or royalty rates;
  • Where appropriate, consider terminating licenses and negotiating penalties.


Financing


Apparel suppliers will need to have available sources of cash to carry them through the lean times. As most banks and conventional lenders have tightened lending standards, suppliers may find their traditional lending sources unable or unwilling to extend additional lines of credit. Owners of apparel manufacturers or importers may consider:

  • Investigating "second tier" lenders, who aren't subject to the same oversight and regulation as banks, and often may tolerate more risk. Although rates are typically higher than, banks' and traditional lenders', access to cash is more critical today than the incremental cost;
  • Exploring "alternative" financing methods, such as purchase order financing;
  • Monetizing and borrowing against other assets, such as equipment or intangibles, in addition to the traditional accounts receivable and inventory.


While every leading economist believes we are experiencing a severe downturn, everyone expects that eventually a recovery will occur. When that recovery occurs is a subject for debate. In the meantime, this article outlines many survival ideas and considerations for apparel entity owners and managers.


However, here is the important theme to walk away with: owners and management must become proactive. Take important, business-sustaining action. Do not sit around doing business as usual while waiting for the recession to pass. Those who follow that path virtually guarantee that their company will have "passed" along with the recession.


About the Author


Glen Podhorzer, is a partner, CPA, Weiser LLP. He specialize in providing auditing, tax, forensics, litigation support, and management advisory services to clients in the apparel and textile, import, distribution, and manufacturing industries. He also has extensive experience working with troubled companies in various industries in analyzing operations, and developing and implementing strategic plans to help in the restructuring and turnaround of companies. He has worked on numerous forensic and litigation support engagements for attorneys and insurance companies and has acted as an expert witness at arbitration. For nearly a century, Weiser LLP (www.weiserLLPcom) has provided accounting and consulting services to professional services groups, business enterprises and high net-worth individuals. Weiser ranks as one of the top 10 accounting firms in the New York metropolitan area and top 20 nationally.