SNIFFING TROUBLE ON SEVENTH AVENUE
The news flew through the showrooms on Seventh Avenue faster than a changing hemline: Heller Financial Inc., one of the apparel industry's largest factors, had stopped approving orders to Saks Fifth Avenue in late July. When factors--little-known fashion financiers that buy apparel manufacturers' receivables at a discount--refuse to guarantee shipments, they're signaling that they don't trust the store to pay its bills. It's a drastic move that can shut a store down in days: Similar moves by Heller and other factors presaged the bankruptcies of chains such as Federated, Allied, and Carter Hawley Hale.
Of course, Saks didn't shut down. Other factors continued to approve orders, so Saks has weathered the storm for now. But Heller, a subsidiary of Fuji Bank and one of the most conservative factors, remains upset that privately held Saks won't provide more access to financial statements. With the raft of bankruptcies, factors have become the vocal naysayers and referees of the beleaguered retail trade.
'PRESSURIZED.' But if factors can sound the death knell for retailers, the industry's woes are taking their toll on factors, too. Many have been left with millions in unpaid claims from the hordes of retailers that have gone under. And many factors have themselves gone out business. "The environment has become much more pressurized," says Parker Lapp, president of the current asset management group at Heller, where earnings dropped 26% to $75 million last year. "This past year might rightly be called Operation Retail Storm."
The Heller incident pointed up just how important--and nervous--retail factors have become. For decades, factors toiled as Seventh Avenue's methodical, anonymous bankers, quietly lending money to apparel manufacturers and checking retailers' credit history.
The business may sound simple, but it hasn't been easy lately. Fifteen years ago, 35 to 40 major factors ministered to a burgeoning retail industry. Now, there are fewer than 20. Many of the large, bank-owned factors have gotten out of the business: Chase, Citibank, Bankers Trust, and Chemical Bank have all sold or closed their factoring operations. Bank of New York, which lost $3 million for the first half of the year, is hoping to sell its BNY Financial Corporation soon.
And the survivors are changing their ways. At Heller, the old litmus test for approving shipments to a store--"Did they pay us on time last month?"--isn't enough. Now, Heller's analysts examine retailers' earnings projections and try to calculate how close the store is to breaching its bank covenants. CIT Group/Factoring, jointly owned by Manufacturers Hanover Corp. and Dai-Ichi Kangyo Bank Ltd. and the industry's largest factor, now has a department devoted solely to checking stores that have gone through leveraged buyouts. Says Francis X. Basile, CIT Factoring's chairman: "There's a whole new language of EBIT and EBITDA," or earnings before interest, taxes, depreciation, and amortization, the measurements used to gauge an LBO's vitality.
'OBSCENE.' For some factors, retailing's woes are only proof of how much they're needed. "Without bankruptcies, we wouldn't be in business," says John Heffer, president of Republic Factors Corp., a unit of bank holding company Republic New York Corp. "No one would want guarantees." Chuck Schwartz is one recent convert. As president of Cattiva, an upscale women's apparel manufacturer, Schwartz sells over $10 million worth of merchandise a year to such retailers as Saks and Neiman-Marcus. Until 1988, Schwartz says, he had no problems getting paid and never used a factor. "But from 1988 to 1990, my bad debts were out of control," he says. So this year, Schwartz handed his receivables to Heller Financial.
Not all manufacturers are enamored of factors, though. Bud Konheim, president of Nicole Miller, which sells $35 million of women's apparel and men's ties annually, got fed up with factors playing the float with his money. "We had occasions where it took 10 days for a factor to deposit a check," he says. "That's obscene." Konheim now gets financing from his bank.
Whether factors are the industry's safety net or its usurers, they're certainly its bellwether. They're usually the first to know how retail sales will do in the next quarter. And what do they see coming up? "There's a very definite pickup in orders being placed," says Basile. "It may turn out to be a surprisingly good Christmas. But have we seen the last of the big retail bankruptcies? No." So expect the factors' ominous bells to start tolling again one of these days.THE BIG FACTORS IN FACTORING
Factor Total receivables bought in 1990
Millions of dollars
CIT GROUP/FACTORING $6,800
HELLER FINANCIAL 6,500
BNY FINANCIAL 6,200
CITIZENS & SOUTHERN COMMERCIAL 5,800
CONGRESS TALCOTT 4,200
REPUBLIC FACTORS 4,200
DATA: COMPANY REPORTS
Laura Zinn in New York