Retailers are shooting themselves in the foot by choosing not to pay vendor invoices on time, particularly as those ripple effects work their way upstream.
Nearly a month after most apparel and footwear retailers temporarily shut down their store operations amid government-mandated social-distancing guidelines, companies including J.C. Penney Co. Inc. and Macy’s Inc. have continued to put a hold on payments to vendors in favor of strengthening their war chests with as much cash as possible. Many other retailers have made unilateral decisions to extend payment terms as a means of keeping their cash flows intact, but the move is damaging their vendor and their vendor’s vendors.
One finance executive in the fashion industry said most small and medium firms have had to delay their payments on rent and to their raw goods suppliers, as they’re not receiving payments from many of their retail customers. In effect, they are being forced to do to their suppliers what their customers are doing to them. And some of those vendor firms believe many of their suppliers and factories in Sri Lanka, Bangladesh and Vietnam–and even China–may end up folding up shop, the source said.
In the fashion industry, the purchase orders placed are considered binding contracts, which means changes in terms should be negotiated between retailer and vendor.
British online fashion e-tailer Asos Plc is doing just that. “We are working closely with our suppliers across the business to agree [on] payment terms, extensions and holidays where it is relevant to do so and have taken swift action on discretionary cost control,” Mathew James Dunn, Asos’ chief financial officer, said last Wednesday during a company conference call on first-half interim earnings results.
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Other firms, such as Capri Holdings Ltd., are also working with their partners to extend the terms of future payables at they look to maintain financial flexibility.
Who’s delaying and who’s paying
The unilateral extension is a tactic that was employed back in 2008 and 2009 during the Great Recession, but this time the extended time periods are far longer than just an extra 30 days. Many retailers are now expecting to pay in 90 days, factoring a typical 60-day grace period once goods are received.
Macy’s ask is more reasonable than that. “We previously announced that we extended payment terms for vendors to 120 days,” a spokeswoman for department store company said.
Meanwhile, Penney’s said last month that it, too, was “extending the terms for payment of goods and services,” but it wasn’t immediately clear if the extension was unilateral. The company did not respond to a request for comment on when the extension might lift or if there are any talks with vendors on payment terms.
Most retailers initially had a knee-jerk reaction and stopped payments, while many also pushed out agreed-upon payment terms from 60 days to 90, 120 or even 150 days.
Some of those retailers who initially elected not to pay, such as The TJX Cos. Inc. and Ross Stores Inc., are now starting to pay vendors again on a regular basis and at original terms. Industry sources, including one executive who chairs a fashion trade group, said the two off-pricers faced backlash from their long-time suppliers following their initial decision to push out terms.
Separately, a tweet from Gary Wassner, CEO of factoring firm Hilldun Corp., on Monday said “Nordstrom is paying very regularly too.” In a telephone interview Tuesday, Wassner said Shopbop.com, Urban Outfitters Inc. and Rent the Runway are among the retailers paying on a regular basis. And Neiman Marcus is starting to make sporadic payments as well, vendor sources and finance executives said Tuesday.
Other firms fall into the same camp as H&M Group, which is honoring orders already in production and paying invoices, as well as Ralph Lauren Corp., which has a vendor payments program in place for suppliers to receive their due on a shorter time schedule.
And retailers such as Walmart Inc., Target Corp., Costco Wholesale Corp. and Amazon.com are among those readily settling up their supplier invoices. But they’re also fortunate to fall under the “essential” designation as they offer groceries and other critical household goods. It’s those that have had to close brick and mortar due to COVID-19 that have taken action having adverse effects on the vendor community.
Why apparel vendors are at risk
Compounding the problem is that retail consultants advising commerce clients have been advocating that merchants hold back all payments to keep as much cash in the bank as possible. In a BDO webinar on Monday, David Berliner, who heads up the firm’s restructuring and turnaround practice, discussed executing cash-flow forecasts for the next 13 weeks to 26 weeks and reviewing revenue forecasts. In the current environment, “cash is king,” he added. “Scrutinize every bill. Ensure that none are paid earlier than necessary” and put off payment as long as possible, he recommended.
While that may be the right advice for retailers, it can be a recipe for disaster for vendors operating on tight margins.
“Vendors in the apparel industry are typically undercapitalized. Most are privately owned and right now are skating on thin ice with regard to their capital base,” said Allan Ellinger, co-founder and senior managing partner of investment advisory firm MMG Advisors.
Ellinger surmises that the retailers that have begun to pay invoices again do realize the importance of their vendor base, but that it’s only now after having drawn down on their available lines of credit that they feel they have a safe operating cushion to get through the next few months.
Vendors, he added, need to get some payment so they can help support their own supplier base and ensure they survive to work on future orders. “Not doing so could have long-lasting implications on the sourcing side,” Ellinger said.