As Fashion Industry Adapts, Hopes And
Fears Mingle

By Richard Collings

Published: August 31, 2009

   In the words of one industry executive, the past eight months have been the most challenging of his career. The same could be said for fashion as whole, since perhaps the Great Depression.

   And although key officials such as Federal Reserve Chairman Ben S. Bernanke are optimistic about the economy’s recovery, there is still the belief a rebound will be slow and unemployment will be high for at least a year.

   A number of executives remain concerned that increasing and lingering unemployment and problems in commercial real estate could further drag down retail sales and revenues.

   Bud Konheim, CEO of private New York-based Nicole Miller, said that apparel sales are down to about their 2006 levels. When contrasted with current unemployment numbers, one might wonder not why are sales down so much, but why aren’t they down even more?

   It could be said 2006 was not such a bad year in the industry, and unemployment was much lower then. But then as Joelle Malka, retail director of private Culver City, California-based Charles David, reminded, everything is relative.

   An industry analyst who declined to be named for this article, said stimulus spending by the federal government is part of the reason numbers are not as bad as they could be.

   Yet, once stimulus spending runs out or the government loses its appetite for such, what will hold up the economy with consumption accounting for some 70 percent of it as manufacturing continues to leave the U.S.?

   The analyst is doubtful that advancement in areas such as biotechnology and green technology, the latter aimed at promoting a cleaner environment and reducing reliance on foreign oil, will have much of an impact, though it could be helpful.

   For now, executives such as Jamie Salter, CEO of the Toronto-based private equity firm Hilco Consumer Capital, have indicated consumers are on a diet.

   Those laid off from their jobs may still be enjoying severance package payments and benefits, taking vacations, engaging in the kind of consumption they did before, although restrained, and with an eye for bargains.

   But what if unemployment lingers, severance packages begin to run out, and the economy has yet to show signs of a recovery in terms of the job market?

   An industry executive who declined to be named for this article said his company’s revenues are down about 20 percent this year, but went on to say that consumers may still be in denial, and are spending too much, and also questions what will happen as severance packages run out and unemployment lingers.
   Lingering unemployment may not only have the effect of cutting into consumption over the short-term, but could ultimately lead to permanent shifts in consumer behavior.

   The executive said fears concerning the job market are not unfounded, for the big question is where will the new jobs come from? He said, although he is optimistic about the long-term prospects for the U.S. economy in 10 years, he believes it could take at least two-to-three years before the economy shows real signs of recovery.

   The industry analyst concurred with that executive’s concern about the generation of new jobs.

   On top of this, industry analysts, investment bankers, and executives are bracing for a decline in commercial real estate, which could leave store fronts vacant, shopping centers half empty and malls quiet across the country.

   “I’m waiting for the next shoe to drop,” Malka said, referring to the problems in commercial real estate and how that could impact sales at her company’s 24 boutiques, if surrounded by boarded-up store fronts.

   And although the sale of residential real estate is stabilizing, even rising, home prices, which backed much of the spending spree by consumers over the last decade, are expected to continue to slightly deteriorate, said an industry investment banker.

   Problems in commercial real estate and lingering unemployment could lead to another poor holiday season for retailers. Salter said that if there is a bad holiday shopping season, it will lead to another wave of bankruptcies.

   Malka said that she hopes her company can recover some loses this holiday season, and noted that while the fourth quarter could be a dismal one, it will be compared to an awful fourth quarter last year, so any year-over-year gains will be seen as an improvement.

   And the industry figures agreed that companies have generally cut costs enough to be profitable in this environment.

   The industry analyst said that the real effect of any government stimulus spending, including the bailout of the banking system and the auto industry, was psychological.

   As reported in news services earlier this year when the Dow Jones Industrial hovered above 6000, Warren Buffet, CEO of listed Omaha, Nebraska-based Berkshire Hathaway, declared to cable business news channel CNBC that the economy had “fallen off a cliff.”

   Assuaging investors' and consumers’ fear of a Great Depression-like downturn was the priority, and the government’s efforts were key towards achieving that in the short-term, the analyst explained.

   A cheaper U.S. dollar could also mean more demand for products and an up-tick in the sale of technological goods and services to other countries, which could be one source of hope for the economy, the analyst added.

   An industry source close to listed Miami-based Perry Ellis struck a more optimistic note, stating that while it’s difficult to predict at this point, it could be that the economy will “bounce around the bottom for the next nine months,” with a visible recovery taking place by late 2010.

   And that’s perhaps what lies ahead for the economy and the fashion industry in coming months. Meanwhile, companies are still shifting their strategies to adapt to the current reality.

   As two industry investment bankers noted, while credit has loosened, it is still very difficult to obtain, hampering plans for growth, to go public, or to seek a liquidity event of any kind.

   Mergers and acquisitions are down for the year, and not likely to increase significantly aside from the occasional sale of distressed businesses. Initial public offerings would likely be as problematic, said one industry banker, although not impossible, if the company has the courage.

   Tightened credit, though, has meant fewer deals, which in turn has led to lower valuations, which also means that fewer companies will seek to be acquired.

   Fashion businesses such as private New York-based Michael Kors and private Huntington Park, California-based Citizens of Humanity are likely waiting for signs of a recovery in the economy and valuations before seeking a liquidity event.

   In the case of Citizens of Humanity, a premium denim brand, it could be 2011 before it seeks a sale. Private denim company Rock & Republic, based in Culver City, California, is focused on adapting to the changes in fashion and the economy in general, rather than think about a sale or bringing on board investors.

   And while Nicole Miller could consider a future IPO, Konheim said a lot of mergers, acquisitions and IPOs don’t make a great deal of sense right now.

   Yet, Hilco Consumer Capital could take its investments public within the next two years, Salter said, and continues to seek acquisitions.

   Listed Philadelphia-based Urban Outfitters, rich in cash, believes now is an ideal time to make acquisitions and could engage in buys of businesses with revenues between $10 million to $30 million, said its Chief Financial Officer John Kyees.

   The source close to listed Miami-based Perry Ellis described the company’s “nature” to be an acquirer. Private San Francisco-based Levi Strauss is not ruling out buys. Small apparel firms such as Duckie Brown could welcome the right investor, even while not actively pursuing it.

   Listed New York-based Phillips Van Heusen, the parent of Calvin Klein, said it could use its cash for acquisitions, according to a recent earnings call, but wonders if attractive targets, with valuations being so low, would want to cut a deal.

   While a good deal of merger and acquisition activity has been put on hold, companies have had to cut costs. One of the most significant areas affected is advertising.

   What few dollars remain in companies’ advertising coffers are being migrated from print to the internet, where viral marketing costs less and is more effective.

   Malka said that by utilizing social networking Web sites such as Facebook and Twitter, as well as sending out e-mail blasts to addresses of customers collected at its 24 boutiques, the company gets a bigger bang for its buck, a return that can be measured.

   She said Charles David once advertised in all of the major books, but the footwear business questioned whether it was effectively reaching its targeted demographic. By advertising online, it doesn’t have to wonder.

   Rock & Republic’s CEO Michael Ball said his company has skipped presenting runway shows altogether in favor of launching videos online featuring its clothes. He said such videos, with the likelihood of the denim brand releasing one a month, have a longer shelf life and do not leave the company beholden to the old model.

   Marco Cattoretti, private New York-based Tuleh’s president, noted that private New York-based Tory Burch ultimately succeeded without advertising or doing a runway show.

   In the case of Nicole Miller, Konheim said that while he doesn’t fully understand the internet, he has hired those who do to guide the company’s strategy concerning it, noting that the industry has rapidly changed just in the last two years.

   As companies find new ways to more effectively spend their limited marketing dollars, they are also shifting more of their manufacturing overseas.

   Tuleh shipped its first batch of diffusion line Bryan Bradley, named after the designer, to Neiman Marcus this summer. The line is produced in China, unlike Tuleh, which is manufactured in the New York City Garment District.

   Tuleh, and companies like it, in order to lower prices, are going overseas where it is cheaper to have their clothing made.

   Colin Robertson, creative director of Charles David, said all the designers are having product manufactured in Asia, from Prada to Marc Jacobs, as is his company, which has only increased with the recession.

   He said producing more overseas was necessary to offer customers the lower prices they are demanding, but Charles David has found it can obtain a quality product from its Chinese-based factories. And consumers have either warmed to the idea, don’t know or don’t care.

   Aiding the shift to Asia are factories willing to take smaller orders than before, adding smaller production lines, diversifying into boutique luxury manufacturing, to replace lost business in the area of mass products, Robertson said.

   Citizens of Humanity’s Chief Financial Officer Gary Freedman said the manufacture of mass products will disappear entirely in the U.S.

   Freedman said, however, that the production of limited quantities of premium product would likely remain in the U.S., as in the case of his company. Labels such as Duckie Brown have all of their clothing made domestically.

   But Robertson said that producing in places such as Italy may not be realistic, not so much because of the cost of labor, which is a major factor, but the younger generations do not seem as willing to take their parents’ and grandparents’ places in those factories.

   In addition to shifting manufacturing, fashion companies are also pursuing e-commerce initiatives, but with mixed success.

   At Michael Kors, the internet has been described as a “slow climb” for it, with five percent of its products sold through the internet at department store chain Macy’s, for example. The company has proceeded with planned store openings despite the downturn.

   Cattoretti said that while his company does do some business over the internet via Neiman Marcus’ Web site, Tuleh is best communicated in a bricks-and-mortar atmosphere, where customers can make a connection to the garments by experiencing the fit, quality fabrics and cut of the clothes.

   Malka agreed with Cattoretti in terms of Charles David, citing the same reasons for footwear, although five-to-ten percent of the company’s sales are generated online.

   Duckie Brown’s Daniel Silver, however, said the label’s clothing does well in terms of internet sales. And Urban Outfitters’ direct-to-consumer sales account for 15 percent of its business, which it hopes to increase to 20 percent, though bricks-and-mortar will always be the foundation for its operation.

   Malka said that for the high-end, while e-commerce can add some sales, because the demographic tends to be older, there is more resistance to buying online. She said Urban Outfitters’ direct-to-consumer numbers are very good, but noted that the retailer has a much younger demographic and lower price points.

   Overall, e-tailing has continued to be one of the few bright spots for the fashion industry, and will likely continue its growth trajectory. Yet, retailing online may now be cannibalizing sales at bricks-and-mortar, and the disruption in addition to already tightening wallets could lead to additional store closings.

   Companies may see some opportunities selling goods online, even if limited, but most of the focus may be on having independent boutiques, as in the case of Michael Kors, particularly in the U.S., where a handful of national department store chains dominate the landscape.

   But building retail locations and managing them requires a good deal of capital and a different set of skills than that of operating a wholesale business.

   Citizens of Humanity plans to forgo for the time being opening its own retail stores, Freedman said, offering department stores product with which they can differentiate themselves.

   Rock & Republic, on the other hand, could foresee opening ten of its own stores over the next two years or so. Levi Strauss plans to open more stores than it closes this year, and recently acquired a chain of stores out of bankruptcy that sold its product.

   But the biggest challenge for the fashion industry is getting consumers in the door.

   An excess of inventory has meant that retailers must mark down to move product, which is also a way of maintaining revenues and luring in consumers.

   Oversupply of certain garments has led designers such as Bryan Bradley of Tuleh to pursue a slightly different track. For spring 2010, the label will focus more on sportswear, or clothing for work and everyday activities, in contrast to its recent past that tended to veer towards offering an array of cocktail dresses.

   An unnamed industry executive said that his company is focusing on the core categories it specializes in, rather than attempt to grab market share by entering unfamiliar product territory.

   Malka said Charles David understands that the company needs to not only offer customers more value, or lower prices, but also fresh design. A source at Perry Ellis iterated the same, as that company taps into a trend for clothes to be “preppier” or “dressier.”

   Duckie Brown has continued to pursue its strategy of constantly changing its aesthetic to give its customers something new, but classic enough that it’s a long-term investment.

   At Citizens of Humanity, the attempt is to differentiate itself by locking in exclusive rights to technologically sophisticated fabric blends, in addition to maintaining quicker turnaround times and tigheter inventories.

   Rock & Republic is offering its customers a cleaner, simpler product, at a lower price range, that focuses on fit.

   Nicole Miller continues to aim for clothes that are interesting enough to intrigue its customers, but not so conceptual as to have consumers afraid to wear the garments.

   Most of the designers and executives, though, agreed that the times in which a brand could simply slap its label on a product and consumers would eagerly buy is likely gone.

   While offering customers the necessities or the basics will be part of the equation, the fashion industry relies on creating new product to fuel its sales.

   The demands on designers, who are no longer able to rely as much on branding, to create product people are willing to pay a premium for are higher than ever.
   Yet the silver lining is that this could lead to a more creative and dynamic fashion industry, Malka said.

   While the downturn has tested the resilience of many companies, Malka said it does force brands and their designers to make difficult decisions, become more creative, and be more in-tune with the customer.

   A lot of aspirational spending is likely disappearing, she said. “People realize the value of money now.” Perhaps Nicole Miller's Konheim would agree with that assessment, having stated that fashion "is not emotional anymore."

   In the end, most might concur that while they have significant concerns, if they didn’t have a sense of optimism, they wouldn’t have gone into business in the first place.

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