Rosenthal & Rosenthal is a provider of financial services for the retail business, specializing in factoring, asset-based lending, purchase order financing and direct-to-consumer financing.
Joel Wolitzer, svp/business development for Rosenthal & Rosenthal, recently met with HomeWorld Business Editor-in-Chief Peter Giannetti to discuss the impact of the COVID-19 crisis on the retail credit market and how Rosenthal has responded during this volatile period for housewares retailers and their suppliers.
HomeWorld Business: Some traditional credit insurers reportedly pulled or reduced coverage for many retailers during the COVID-19 crisis. How has this impacted factoring and other forms of asset-based lending?
Joel Wolitzer: Yes, many of the traditional credit insurers have pulled or reduced coverage in reaction to the pandemic. Generally speaking, Rosenthal & Rosenthal, as the largest privately owned factor, has always provided more trade credit than the insurance companies. And now, during these times, we have had the ability to further demonstrate and differentiate ourselves by continuing to provide coverage for many of the retailers.
HWB: Many retailers closed stores during the pandemic, greatly reducing their revenue and cash flow. Some have demanded extended terms on previous orders, and, in some cases, they have cancelled orders. Retail bankruptcies are mounting, and many other retailers that were shaky heading into COVID may have been further compromised by the crisis. How is this affecting your credit evaluations and willingness to factor receivables from vulnerable retailers and channels?
JW: Our in-house credit department analysts interact with thousands of retailers and have access to robust databases of information that feed into all of our credit decisions. In many cases, Rosenthal will receive confidential information from a retailer that will allow us further insight into a retailer’s financial condition and offer way more transparency than a single vendor might be able to obtain.
The extended terms have created cash flow issues for the entire consumer products industry. Rosenthal continues to monitor each retailers’ creditworthiness and cash flow status individually, and in most cases, have been willing and able to provide coverage for the extended terms during this crisis.
We do believe the retailers will return to some form of regular terms in the near future, and we have already begun to see that. In addition to providing credit protection, we have also been lending against receivables and inventory throughout the crisis, which has resolved much of the cash flow concerns of our clients.
Consumers have adapted, more now than ever, to the idea of purchasing online. Vendors need to be where the customers are by selling to the various bigger-box e-commerce channels. They must be aligned with a warehouse that can drop ship for them and can fulfill the goods to the end consumer.
HWB: The off-price brick-and-mortar segment was thriving ahead of COVID, but the channel faces challenges as it reopens to near-term inventory clearance urgency and consumers who are reassessing their physical shopping preferences and risks. What is your prognosis for the off-price segment?
JW: The off-price channel will likely continue to succeed, as consumers look to maximize their discretionary income. With unemployment at an all-time high, consumers are going to look to stretch their dollar further and purchase items that are essential to their everyday routine. Prior to the pandemic, the consumer had struggled with paying full price for merchandise. Price transparency has led to deep discounts at the retail level as retailers compete with each other for market share.
The off-price channel will likely benefit from the excess inventory currently being held by the vendors. Vendors will likely be willing to ship excess or older inventory to the off-price channels to free up space in their warehouse. This will reduce warehousing storage costs and generate receivables, and, furthermore, cash in 30 to 60 days.
HWB: The home and housewares business has performed well during the stay-at-home restrictions, and the category is expected to benefit from long-lasting changes in consumer behavior. What is your view of the home and housewares business?
JW: We feel that housewares companies, in general are poised to benefit from the “new normal” in terms of people engaging more in the home setting as opposed to congregating in large crowds such as restaurants, bars or other establishments.
Rosenthal & Rosenthal certainly anticipates seeing increases in inquiries from the housewares sector given these changes. We have been seeing vendors increasingly concerned about shipping on net 60 terms (or even longer as being requested by the retailers).
In speaking with our clients, vendors overall are becoming less willing to take and fulfill orders on a large-scale for customers without some guidance from us regarding future credit protection on such retailers. As companies cycle through their PPP money and hire back employees to start production cycles again, working capital will be needed to fund these orders. Additionally, leveraging existing receivables and inventory as a form of working capital will also be critical for companies that have suffered cash flow impacts and losses over the last few months.
Many housewares companies that may not have needed factoring or financing before (due to steady cash flow, ability to forecast, less volatility in retail and more diversity of viable retailers) now find themselves in uncharted territory and need the cash-flow assistance and insurance of knowing someone is looking out for them on the credit side and following for payments. A bad debt in this environment could be detrimental to a company in this volatile environment.
We will likely see opportunities from vendors doing business with retailers in different ways, such as new extended terms, drop shipping and the need for financing. This volatile credit environment has given pause for vendors to re-think their risk mitigation strategy for their largest asset, accounts receivable.