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When the ground feels just a little shaky beneath your feet, you call it the Silicon Valley Bank Effect.
Although the US federal government stepped in to avoid a broader financial system meltdown – by guaranteeing depositors would have access to all their funds after a run on the start-up-friendly bank – there are plenty of new problems for fashion.
It’s a minor banking crisis that has the potential to hurt both sides of the fashion business as companies look to check their finances and consumers may become more cautious.
“Of course everyone is concerned,” said Gary Wassner, chief executive officer of Hilldun Corp., which provides financing to many designers. “When things like this happen, it creates even more uncertainty in an already uncertain environment. Many worry about the consequences this could have. Instability breeds doubt and concern.
“When it touches the banking system, it creates concerns about fundamentals that most people take for granted, so the concerns are fundamental,” Wassner said. “Many clients have asked me what that means and what it might imply.”
Wassner described it as “just another bump in the road” – but the question that lingered at the start of the week was how bumpy could the road ahead get?
President Joe Biden tried to allay fears with a short speech before the market opened on Monday.
“The banking system is safe,” Biden said from the White House. “Your deposits are there when you need them. Small businesses across the country that have had deposit accounts with these banks can breathe easy knowing they can pay their workers and pay their bills.”
He also said that the management of SVB and Signature Bank, which were also taken over by the government after stumbling on cryptocurrencies, would be sacked and that investors who took a risk with the banks would lose their money .
“That’s how capitalism works,” he said.
Still, retail investors took no chances on Wall Street.
While the Dow Jones Industrial Average slipped slightly 0.3 percent, or 90.50 points, on Monday to close at 31,819.14 points, fashion was hit particularly hard. Losers included Kohl’s Corp. down 8.1 percent to $22.82; Allbirds Inc., up 8 percent at $1.15; Under Armor Inc., down 7.5 percent to $7.26; Nordstrom Inc., down 7.5 percent to $16.87; G-III Apparel Group, down 5.2 percent to $15.02; and Abercrombie & Fitch Co., down 5 percent to $25.62.
While the concern over the weekend was that the startups that filed their payslips with the SVB would suddenly be unable to pay their employees — a concern the Biden administration has now addressed — there were other consequences.
Already struggling Stitch Fix Inc., for example, found that its cash cushion had shrunk and said it did not expect to have access to SVB’s $40 million stake in a company, according to a filing with the Securities and Exchange Commission $100 million revolving credit facility.
Stitch Fix does not plan to draw on this line of credit and said it has sufficient availability to meet working capital needs.
That was enough to please investors, who sent Stitch Fix shares up 4.4 percent to $4.96 on Monday.
But the styling service – and the rest of retail – is now selling to an unsettled clientele, tired of the crisis and already plagued by high inflation.
“Consumers don’t like risk, they don’t like volatility,” said David Bassuk, global head of retail practice at AlixPartners. “The [stock] the markets know how to read this and the markets are therefore turbulent.
“What we’ve learned from the past is that when there’s a crisis of this kind, consumers really pull back, they’re very responsive,” Bassuk said. “The spending difficulties are real and they make sense and the consumer, their psyche just takes over.”
But Bassuk, who drew on a study of the last six major crises since the 1987 stock market crash, said consumers would retreat quickly but also recover just as quickly.
“We have to be prepared for that,” he said.
The hope is that the problems will pass quickly.
Adviser Hemal Nagarsheth, a partner in Kearney’s financial services practice, said SVB was “not representative of many other banks” and there was no sense of “contagion” where its failure would spread widely across the financial system.
“They were quite different in many ways,” Nagarsheth said. “They were a high-flying bank, some people claim they’ve always attracted money that might not have been very stable to begin with.”
Still, he said it’s a good time for companies to look closely at what kind of risk they — and their partners — are taking.
That goes double for areas like crypto, where many fashion companies have dabbled.
“It doesn’t hurt to say, ‘Let’s take a second look at how I manage risk for all the partners and vendors I use?'” Nagarsheth said. “What have you done to make sure you’re all aware of who you’re relying on and the risk you’re taking, especially when you’re looking at something that isn’t traditional? Crypto is just one example.”
So while the fashion industry’s accounting departments por over their books just in case, the rest of the industry can keep their fingers crossed for now.
