For Clothing Makers, It's Cut or Be Cut
January 6, 2002
By LESLIE KAUFMAN
[T] HE dawn of 2002 brought no happy new year to clothing makers. For them, the squeeze is on.
The recession, economic reverberations from Sept. 11 and unseasonably warm weather leading up to Christmas combined to clobber apparel sales last year. December was particularly gruesome. With sweaters and winter coats piling up at the pinnacle of the shopping season, desperate retailers dropped prices by as much as 70 percent. Someone must pay the price of that discounting, though, and the time of reckoning is at hand.
The pain of sharp markdowns will be felt all the way down the retail food chain, though the brunt will be borne not by the stores, but by the apparel manufacturers and wholesalers that supply them with everything from designer denim to cashmere overcoats.
The ranks of these businesses are expected to shrink sharply in the coming months, according to bankers, other creditors and many manufacturers themselves. Donna, Tommy, Ralph and Calvin are all expected to suffer some, but the real trouble will be felt by the thousands of midsize and small companies, those with sales of less than $100 million ? companies like Bisou Bisou, the maker of a trendy women's line. Many, like Bisou Bisou, which is on the verge of filing for bankruptcy for its retail operations, could seek court protection, following in the recent footsteps of many American textile manufacturers, including Burlington Industries (news/quote) and Malden Mills Industries.
"The domestic fabric suppliers are all already almost out of business," said Adam D. Winters, a senior vice president at the Merchant Factors Corporation, one of the industry's largest suppliers of credit, "and now the apparel manufacturers must consolidate or go out of business."
Trouble among apparel makers, of course, is hardly headline news. Low-cost competition from overseas has been driving apparel manufacturing offshore, and retailers have been extracting steep concessions from their suppliers for years ? especially since the late 1980's, when bankruptcies and consolidations among retailers left fewer, but more powerful chains to buy the goods. For about a decade, department stores in particular have been using this strength to elicit concessions like "markdown money" ? the payments that retailers demand from manufacturers, after the season, to make up for whatever profits they lost by putting goods on sale.
But 2001 was different. Apparel sales were soft all year; so were prices. As the economy weakened, credit tightened, leaving many manufacturers and wholesalers in a vise.
"There is very little margin for error in this environment," said Paul Charron, the chairman and chief executive of Liz Claiborne Inc. (news/quote ), one of the few companies that saw third- quarter revenue and profits improve from last year. "Large, sophisticated retailers are looking to do business with large, sophisticated suppliers. Management that has not executed with precision is in big trouble."
The exact damage to the sector will not be known for a few weeks ? it is in January that retailers sit down with suppliers and demand cash back for those goods sold at discount prices or delivered late or in imperfect condition. The omens, however, began to emerge in late October and November, when the largest apparel makers reported discouraging third-quarter results and hinted that there was far more more bad news to come.
The VF Corporation (news/quote ), the maker of Lee and Wrangler jeans and Vanity Fair lingerie, is laying off 13,000 employees, or 18 percent of its work force. Kellwood, the maker of Sag Harbor, Sierra Designs and Kathie Lee Gifford's line for Wal-Mart (news/quote ), said its net earnings for the quarter would decline nearly 50 percent, compared with the period a year earlier, partly because its margins were being squeezed at retail.
For the quarter ended in September, Donna Karan International (news/quote ), owned by LVMH Moët-Hennesy Louis Vuitton, the French luxury conglomerate, had a net loss of $53.7 million, down from a profit of $14 million in the quarter a year earlier. And in October, the Jones Apparel Group (news/quote ), parent of Jones New York, whose blazers and pants are popular with working women, substantially cut earnings expectations for 2002, to $2.60 a share from $3.29, in part because of an expected "heavily promotional environment" at retail.
Those numbers, however, do not tell the full story. The largest apparel makers are actually in the best shape. The middle tier ? companies with $5 million to $100 million in annual sales ? is feeling more pain. One such company, BCBG Max Azria, based in Los Angeles, is short on cash and has been slow to pay its own suppliers; the company is now instituting 10 to 15 percent across-the- board cuts in expenses. Mad Engine, a San Diego company that sells T- shirts embellished with designs and sequins to department stores and to larger manufacturers like Levi and Polo Ralph Lauren (news/quote ), has laid off 50 percent of its headquarters staff. And Michael Kors, a designer whose company is partly owned by LVMH, was on the verge of a multistore rollout of his mid-priced line with Bloomingdale's when the deal collapsed, he said, after he refused to guarantee profit margins. Bloomingdale's, a unit of Federated Department Stores (news/quote), denies that it asked Mr. Kors to guarantee margins.
Because most domestic apparel makers are middle-tier private businesses, often family affairs, they lack the resources and the muscle to fight back when retailers knock them about.
Princess Knitwear, for example, a small company based in the Bronx that still has manufacturing operations in New York City, has survived by producing only high-end goods to order. In the fall, it took on a sizable order for plus-size separates from an upscale department store chain that George Wolf, Princess's owner, declined to name. For four years, it had been a good client, paying in full and on time, according to Mr. Wolf. But, he said, he received a call two weeks before the order was due to be delivered in October from the store's buyer, saying that if he did not cut the price by 33 percent, the store would cancel the order.
Mr. Wolf said he protested that such a cut would wipe out its profit margin. The buyer apologized, Mr. Wolf recalled, but insisted that extraordinary times called for extraordinary measures.
With no choice but to discount or to let the made-to-order knitwear sit in his warehouse, Mr. Wolf swallowed the costs. "We should all be in this together," he fumes now. "Instead, department stores want to maintain their profit margin and have us shoulder the whole sacrifice."
Such hardball tactics, while not new, have been spreading. Some manufacturers report that Kmart (news/quote ), the giant discount chain, has been dodging payments lately. At Thanksgiving, Kmart owed Playtex, a division of Sara Lee, $90 million on already-shipped inventory, some $50 million of which was long overdue, according to executives close to the situation. When Sara Lee stopping shipping Playtex products, the executives said, Kmart paid $15 million, but as of three weeks ago was still in arrears for the rest.
Kmart denies that it is having trouble with Sara Lee. "Today we have a normal account balance," said Jack Ferry, a company spokesman, "and we made regular payments during the time in question."
A spokeswoman for Sara Lee declined to comment.
Vendors also complain that J. C. Penney, which in late 2000 hired Allen Questrom, formerly of Barneys New York (news/quote ) and Federated, as chief executive, has been aggressively stepping up demands for cash support in areas like advertising and markdown money. "It is the new hierarchy over there," said Alby Amato, the chief executive of Mad Engine. "They want guaranteed margins on everything."
A spokeswoman for Penney said: "We are more competitive in ways we weren't before. Our vendors know it is a war out there."
The trend even affects Wal- Mart Stores, where sales for stores open at least a year rose by an estimated 6 percent this past holiday season. The chain, which has a reputation for negotiating thin margins up front but then sticking with them, has been asking for cash back after this season of sales, according to many factors and vendors who asked not to be identified.
Jessica Moser, a company spokeswoman, said, "We work to make our business agreements mutually beneficial for both us and our suppliers."
Hal J. Upbin, the chief executive of Kellwood, confirmed the epidemic: "My client list is the top 20 vendors in the country," he said, "and I can't think of one who is not doing it at some level."
As retailers become more demanding, creditors ? usually factoring companies, the financial middlemen that finance manufacturers and collect payment directly from retailers ? have become less forgiving, too. "The factors are becoming extremely tight," said Marc Bohbot, the chief executive of Bisou Bisou, which sells $40 million of apparel a year to department stores. "They are looking over the shoulder of every management, and they want 10 times the guarantees of last year to loan money. They investigate any asset outside the corporation in order to get liens on buildings, homes and even cars to guarantee the loans." (Creditors look at personal assets for family-owned companies.)
Macroeconomic conditions, meanwhile, are worsening. Prices paid to producers of apparel have been spiraling downward since 1999; since November alone, the index of those prices has declined almost 1 percent, according to the Labor Department. "The success of discount retailers like Wal-Mart, Kohl's (news/quote ) and Target has helped drive prices down," said Carl Steidtmann, chief economist at Deloitte Research. "It means if you are a midlevel manufacturer, life is not very fun. Because you can't take advantage of economies of scale, you must compete on something other than price, and in today's market that is a difficult challenge."
Midlevel manufacturers who are feeling such pressure, of course, have the option of trying to sell out to larger companies, and many are doing just that. But will they find buyers? "A lot more companies are willing to be acquired," said Mr. Upbin, of Kellwood. "We are seeing more deals than we have ever seen before, but how many deals can you do?"
In 1999, the latest year for which figures were available, there were almost 17,000 apparel manufacturers and wholesalers in the United States, according to the American Apparel and Footwear Association.
Daniel A. Greene, a senior vice president of FleetBoston Financial (news/quote ), one of the most active banks in the retail industry, said he anticipated "more consolidation in the coming year, but there are many more sellers than buyers."
The recession is separating big companies from small companies in obvious ways ? like which have more cash ? and also in less obvious ways, as in which are more technologically current. Usually, only big manufacturers can afford the most advanced computer systems that help identify sales trends early and predict buying patterns, helping to control inventory.
"We have invested heavily in technology," said Mackey J. McDonald, the chairman and chief executive of VF. "We think it is critical to servicing the retailer and in forecasting trends and needs."
Plenty of companies will survive. Yet for everyone but the large and powerful and the small-but-hot fashion houses, the game is now much less fun. "Anything with production in the United States is a dying breed," lamented Mr. Amato of Mad Engine. "I look at what is happening and I say, `I've got to get out of the manufacturing end of it.' "
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