The local apparel industry is fighting for its very survival. “I think it’s a no-go kind of year,” said Rob Greenspan, partner at accounting firm Moss Adams LLP, which has offices in Woodland Hills. Greenspan’s practice area is the apparel industry. Apparel orders for spring fell by double digits in January. Worse, future indicators show the downward trend continuing indefinitely. The problem is twofold: Credit is largely unavailable to retailers and manufacturers, and demand for apparel (with the exception of clothes sold by Wal-Mart) has evaporated. The credit crunch creates a vicious cycle in the industry, which is driven by orders placed far in advance of delivery. The basis of trade in the apparel industry is manufacturing orders placed by retailers. The orders are effectively used as collateral against credit a practice known as factoring. Factoring is how the manufacturer gets paid and how retailers buy inventory long before customers ever see the product. But the factoring system has been hit hard by both the overall credit bottleneck in the U.S. economy, as well as by the bankruptcies of major retailers, such as Mervyn’s. The large chain store closed doors across the country in November. But the apparel industry’s problems began early in 2008. “Maybe the premium brands weren’t hit in the early part of last year,” said Martin Hughes, Moss Adams partner and Apparel Group leader. “But they are seeing it this year.” Not surprisingly, many of the solutions CPAs to the industry have to offer come from accounting firms. “There is a lot as accounting consultants we can do,” Hughes said. Outsourcing is one solution he offers. “We can help get the right people…who can do [formerly salaried jobs] on an hourly basis,” Hughes said. Cost cutting often means laying off or reassigning workers. Both exercises leave skeletal departments in the center of a company’s infrastructure. “We tell them how to build a department and how to dismantle a department,” said Hughes. Moss Adams considers itself the dominant apparel industry accounting firm in the West, and has a strong handle on the challenges manufacturers are facing. “We started addressing the problem very early,” Hughes said. “A lot of it started when Mervyn’s started having problems getting credit.” Factoring is the financial foundation of the apparel industry. “Not being able to ship orders because they were not able to get factors to give them credit caught a lot of people by surprise,” Hughes said. With $200 million in annual sales, Self Esteem Clothing is one of Moss Adams’ local apparel clients experiencing pressure as a result of factoring troubles. “We got burned by the bankruptcy of Mervyn’s and Goody’s Family Clothing in Tennessee,” said Self Esteem owner and president, Richard Clareman, speaking to the Business Journal from an industry event in New York. However when factors cut Mervyn’s off six months before the retailer closed its doors, Clareman began requiring up-front payment for orders. That measure limited Self Esteem’s losses. “We lost a little money, but that was at the end of a long, profitable relationship,” he said. “Usually the factors know what they’re doing. Still, you have to make the decision based on your relationship with the retailer.” Clareman said, at the moment, Self Esteem is holding its own. “You have to be well financed with a lot of capital on your balance sheet,” he said. “I’ve reserved a lot of money.” Clareman said the factoring community is aggressively watching retail companies for signs of trouble, and while he appreciates factors’ diligence, there can be snags even when a retailer gets credit for an order. “When they can get credit the banks aren’t releasing funds until the 24th hour.” Self Esteem Clothing does most of its manufacturing overseas these days, but the maker of junior fashions and children’s apparel still has suppliers in the Valley. As worrisome as the credit situation is to the apparel industry, sales figures are of even greater concern. “If you look a last holiday’s sales figures as an indicator of the road ahead, you see the challenges our clients are facing.” Statistics from the government show that, although January retail sales were up a point over the previous month, year over year they were down almost 10 percent. Final figures for February will be out later this month, but no one expects an improvement. To survive the chilly sales climate and the credit crunch, Moss Adams has some basic tips for manufacturers in the Rag Trade. “You have to right size your business,” Greenspan said. “If you’re sales are not going up and gross profit margins are not going up, it may mean smaller product line; less people; closing showrooms; less speculation on inventory,maybe outsourcing.” Greenspan added companies that hire out their shipping needs might find vendors can also take over other aspects of operations, such as quality control. Greenspan believes staying liquid, avoiding undue credit,even with trusted customers,and only shipping up to the amount approved by factors are all necessary measures for apparel companies to stay in business in 2009. “The people who act quickly and are not in denial will survive,” he said. “It’s best to take a conservative approach, however rather than getting aggressive and launching new lines.” Now is the time for good instincts and courage, according to Martin Hughes and Rob Greenspan. However, neither takes the current situation in the apparel industry lightly. “I’ve been at Moss Adams in the apparel business for 30 years, Martin for 20, and I’ve never seen it this bad.”
