CIT, which was seeking its second federal bailout since December, is one of several factoring firms in the industry that buys companies’ accounts receivable and open letters of credit and serves in other financial support roles.
The American Apparel & Footwear Association estimates that 60 percent of the factoring volume in the apparel and footwear industry is represented by CIT — and CIT itself reported in 2007 doing $2 billion annually in the footwear industry — forcing many companies to scramble to assess their possible exposure to the sinking firm.
Most major public footwear companies will likely remain safe no matter the fate of CIT because they have resources to keep their accounts receivable in-house. And several smaller public firms, including Rocky Brands Inc., Weyco Group Inc. and R.G. Barry Corp., told Footwear News they had no ties to CIT. Earlier this month, Skechers USA Inc. moved much of its credit business from CIT to Bank of America N.A. and Wells Fargo Foothill, and Steven Madden Ltd. on July 16 announced a new factoring agreement with Rosenthal & Rosenthal Inc., upon the termination of its contract with current factoring partner GMAC Commercial Finance.
But even those public footwear companies doing business with CIT, including Kenneth Cole Productions Inc., which has a receivables management agreement with the firm, are likely to get funding elsewhere. “Larger companies could probably find another factor pretty easily,” said R.J. Hottovy, an equity analyst with Morningstar Inc., adding that most can afford to take the business in-house.
Smaller footwear firms and retailers, though, may be less fortunate. A CIT bankruptcy could decimate companies that are not well capitalized, said analysts. “Some of those companies are not going to make it through this situation,” said Jeffrey Van Sinderen, a senior analyst with B. Riley & Co. “Even if CIT does get bailout money, it will probably tighten its standards for factoring relationships. Almost everybody has some sort of relationship with CIT, whether they’re a small brand, a private-label vendor or a mom-and-pop shop that can’t afford to buy product until it’s been sold. This is going to have an enormous impact on the global retail industry.”
With CIT’s future still in limbo at press time on Thursday, the footwear industry weighed in on possible ramifications.
Kevin Burke, president & CEO, AAFA:
“What bothers me is that all these large banks and auto companies were taken care of, while CIT is working with small businesses, which will be devastated by this. What I’m most worried about are those [vendors] who aren’t going to find access to capital without CIT. This is akin to taking motor oil out of an engine and expecting it to run. Look at footwear: 99 percent of shoes are made off-shore, 96 percent in China. If these companies have a difficult time accessing capital at any stage of production, factories are going to have less confidence in their ability to be paid. It’s a supply chain mess.”
David Zaken, president, David Z.:
“A lot of the shoe companies — maybe 10 percent — will find themselves out of the game because they work with CIT. [The CIT fallout] could have an effect on some of the brands I carry in my stores. Not for fall, because everything is in the pipe already, but definitely spring. Credit is king, and this is absolutely survival of the fittest and nobody is immune. What we might see is if Brand X is an OK brand but is having liquidation difficulties, they might merge or be bought by a bigger company.”
Gilbert Harrison, chairman, Financo:
“[The potential bankruptcy] is going to present problems for everybody in the industry, depending on what the outcome is. Whether it’s the factoring, the vendor finance program, the letter of credit or small business loans, they are all going to be affected in some way.”
Jerry Turner, chairman, American Sporting Goods:
“I can’t believe we can spend billions of dollars to protect tens of thousands of auto workers and not protect hundreds of thousands of small businesses. That’s unacceptable. [If CIT isn’t bailed out], you have to question the thought process of the government. It’s certainly going to be impactful to the small entrepreneur who is the backbone of our economy. This is a killer blow.”
Danny Silvera, marketing & PR director, Seychelles:
“I don’t think the government will let them go under. Think of how many people would be burned by that. It would be huge. There is nobody else to use. There is no second to CIT. We use them. We could be hurt in the end. If CIT goes under, it’s going to hurt a lot of people. Who is going to make those payments? It’s going to be adding to all this [mess] in the economy that we’re in.”
Michael Stanley, EVP, Rosenthal & Rosenthal:
“A failure of any factor would not be considered a positive occurrence for our industry. We’ve been hearing from many CIT clients that are seeking new factoring, and we do have room to absorb new clients.”
Craig Shearman, VP of government affairs, National Retail Federation:
“We think this could have serious consequences, not just for vendors who receive financing from CIT but for retailers who rely on those vendors. If retailers have to front these costs, they would be very conservative in their purchasing decisions. They’re only going to buy what they know they can sell. It will absolutely be tough [for smaller brands or newcomers targeting key accounts].”
Tony Zelaya, owner, Zelaya Shoes:
“I hate CIT and I think most independent retailers do too — they’re very tough on retailers. But this is going to hurt wholesalers big time. There are some wholesalers who probably can’t survive without CIT.”
Peter Hanig, owner, Hanig’s Footwear:
“My assumption is that someone will snap up CIT. It’s a viable business, and my understanding is that they’re the best in the business. The issue is, what happens to credit and what happens to the attitude toward the vendor and small retailer? As a result of this, will there be a further tightening of credit?”
Bodo Loerke, co-owner, Rough Justice Footwear:
“[The potential bankruptcy] could mean good things and bad things. When big companies go away, smaller companies come in and take their business. Other companies may come in that are more open-minded. The bad thing could be that a lot of independent retailers could have a hard time getting financing and product into stores [in the immediate future]. CIT is struggling because so many retailers are going out of business. That’s the sad part. If CIT is going out of business, that’s a signal that more retailers than we think are having problems.”
Emanuel Weintraub, president, Emanuel Weintraub Associates Inc.:
“Right now a number of my clients are scrambling as to where they are going to get credit. Now what we don’t know is, if CIT goes down, will the other [factoring] companies have the financial heft to finance these [displaced] companies? A terrible amount of unemployment is going to occur. There is a potential here to lose 1 million jobs.”