When companies across fashion and retail began hoarding cash at the start of the pandemic, cost-saving strategies like taking more time to pay suppliers seemed like short-term emergency measures. Turns out, some of these bottom-line financial maneuvers could be around for the long haul.
Covid-19 taught financial executives some harsh lessons, not the least of which was the importance of keeping cash in their coffers. Even now that consumer demand has reawakened with a vengeance, many in retail are wrestling with demand forecasting and remain cautious about shopping behaviors, penchants and preferences that could once again pivot on a dime.
American businesses have $400 billion more in available cash—a 40 percent increase—than they did the prior year, the Hackett Group found in its 2021 U.S. Working Capital Survey, which last year polled 1,000 of the nation’s largest non-financial firms—including textiles, apparel and footwear players. They managed to stockpile those reserves, it added, by pushing payment terms out by 30 days and raising the average timeframe to 62.2 days from 57.8 in 2019. Vendors are now waiting 30 percent longer to get paid versus 10 years ago, Hackett’s data revealed.
Lingering uncertainty is keeping pandemic-era payment terms around as the new normal, according to Hackett principal Craig Bailey, citing a retail chief financial officer whose company is “trying to see where we’re going next, where we’re going now, particularly in terms of consumer demand.” Across the board, Bailey added, many companies are playing the waiting game and hoping to glean clues on how exactly demand is “going to come back,” and whether online-shopping consumers will revert back to brick and mortar.
“When we looked at the end of Q1, we saw that [extended payment terms] continued. We haven’t seen payments being dialed back yet,” Bailey said, adding that many firms saw this invoicing move as an “easy” option for keeping cash on their balance sheets longer.
What’s more, pandemic-driven supply-chain meltdowns rekindled conversations on the risks of having too much supply concentrated in too few hands, Bailey said. But the downside to diversification, he added, is defanging a firm’s pricing power when it comes to negotiating payment T&Cs. “If companies look to diversify, they’ll become a smaller customer to that supplier,” he said.
Retail players from Macy’s to Bed Bath & Beyond have addressed their working capital strategies in recent earnings calls.
Gustavo Arnal, CFO for the home goods giant, said the chain is constantly “optimizing [its] cost structure” with a “zero-based approach.” These steps, he said during BBB’s Q4 April earnings call, include rent reductions and negotiating with vendors to trim input costs.
“That is going all as planned in terms of additional restructuring,” he said, adding that the retailer is “capitalizing on all the savings of the restructuring done last year.”
Macy’s, which quickly moved to shore up its liquidity position in the immediate wake of last year’s first lockdowns, continues to lean on the extended payment terms strategy it implemented in early 2020 to enhance operational flexibility, according to CFO Adrian Mitchell.
The retailer ended Q1 with $1.8 billion in cash—and without tapping its $3 billion asset-backed credit facility, he told investors in a May 18 earnings call. Macy’s $403 million in free cash flow marked a “significant increase” over 2019 as well as a “sizable beat” to its own expectations, Mitchell added, attributing the results in part to delaying vendor payments.
However, Mitchell is all too aware that these results are far from guaranteed to continue, noting that the “magnitude, speed and longevity of this current macro shopping enthusiasm remains a moving target” and that “sales and profits could shift between quarters.” Despite leveraging predictive analytics to improve merchandising and demand forecasting to enhance inventory allocation, Macy’s recognizes the “headwinds” that remain, he added.
And while many companies focused on self-preservation with their pandemic cost cuts, some of the stronger players extended a helping hand to vulnerable supply chain vendors, Bailey said.
Ralph Lauren was vocal about settling “payment for finished goods and goods in production” last year when order pauses and cancellations swept fashion. “Understanding that the scale of the ongoing slowdown of future orders can have a significant impact on our partners’ liquidity, we have a vendor payments program in place which enables suppliers to receive payments on a shortened time frame at favorable market rates,” it said in an April 6 statement, just weeks after lockdowns started, pointing to its “responsible purchasing practices.”