Slippery Footing

When Karen Bell started a sock business from her garage 14 years ago, she had no idea that the garment industry was a cutthroat one where start-ups fail as frequently as styles change.

With a flair for fashion and design and a need to subsidize her modest income as a secretary, she dreamed up the idea of selling anklets embellished with rhinestones or lace. Certain that they’d appeal to young women, she was too much the business neophyte to know that the odds of success were against her.

But it worked out. K. Bell’s first products sold out immediately at a Beverly Hills boutique. And so she stumbled into the rag trade with no formal business training, no relationships with manufacturers or retailers and no master plan.

Today, Bell’s Culver City-based firm, which designs and distributes socks and tights, has $4 million in annual sales, 15 employees and a recognized brand name. Her products are sold at specialty and department stores, including Nordstrom, Wet Seal and Marshall Field in Chicago. Bell expects annual sales to rise by 20% in the company’s next fiscal year, the result of a resurgent juniors market. Still, she’s constantly fighting to remain a player in today’s tough retail climate.

Making money isn’t as easy as it once was. K. Bell is profitable now, but in the 12 months ended in June 1996, rising costs pushed the company into the red.

“I was devastated,” Bell said.

She slashed expenses to restore the company to profitability, and, when K. Bell’s current fiscal year ends next June, she expects to post net income of $230,000 on sales of $5 million.

But the company can improve on that performance, according to two USC instructors who specialize in finance and marketing services.

Jeff Garrison and Lee Reinke Bright, who teach a course for entrepreneurs in the garment industry, said the company is doing more right than wrong. K. Bell has a solid reputation in the trade as a distributor of fashion socks, featuring trendy designs that appeal to juniors, and of mainstream hosiery, such as its best-selling micro-fiber tights. In 1991, the firm started a sport sock division that accounts for 15% of sales.

Both consultants agreed that the time is right for Bell to take a look at the firm’s operations.

“The company needs to get a better understanding of what’s working in the business and what’s not,” said Garrison, a CPA and partner with Stonefield Josephson, a consulting firm in Santa Monica. He advocated a top-to-bottom review, including an examination of K. Bell’s banking relationships, how quickly it moves its inventory and the performance of its sales representatives.

Garrison believes K. Bell should focus on improving the existing business instead of expanding into new areas.

“If she never got another dollar in additional sales volume, we can make her more profitable,” he said.

Garrison’s aim is to improve K. Bell’s gross profit by 5%--a jump that could yield an additional $200,000 in annual net income. Goal one for any company in the capital-intensive garment trade is to preserve cash, and that means using other people’s money when you can, he said.

Traditionally, suppliers will give companies such as K. Bell trade credit, allowing them 30 to 60 days to pay. K. Bell receives these terms from its domestic suppliers but has three Asian suppliers that require payment upfront--tying up thousands of dollars in working capital, Garrison said.

Instead, K. Bell should obtain a letter of credit guaranteeing payment of a customer’s drafts for a specific amount and period. That would help it get more favorable terms from suppliers that would help the cash flow.

Freeing up this cash would enable K. Bell to avoid tapping further into its $370,000 bank credit line and paying interest on that, Garrison said.

He also advocates reevaluating K. Bell’s banking relationship. Bell is loyal to a small Westside bank that backed her fledgling enterprise 11 years ago when others wouldn’t, and she’s reluctant to make a change.

But Garrison believes K. Bell would be better served by institutions with more apparel industry experience and greater tolerance for risk, namely “factors.” Factors are companies that buy a client’s invoices, long a tradition in the garment trade.

Factoring is controversial. These financial companies are often the lenders of last resort for small, cash-strapped companies, generally charging higher interest rates than banks. But at the same time, there’s a large tier of reputable factors that offer competitive rates, and they are often allied with large, well-known financial institutions, Garrison said. They could give K. Bell ready cash and eliminate the risk of bad debt.

“A lot of people don’t want to pay factor fees, but they also do a lot of your credit-checking for you,” Garrison said. “They . . . take the risk if every receivable goes bad for them.” That could be a plus for K. Bell, which had more than $20,000 in bad debt on its books last year.

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Garrison also believes K. Bell is sitting on too much inventory. The company’s “inventory turnover”--an indication of how many times the inventory is sold and replaced during an accounting period--is four times a year. Garrison thinks K. Bell should increase that number to six. The firm could accomplish that by liquidating dead inventory more quickly and through closer monitoring of its shipping habits.

“This is a cash-flow issue,” Garrison said. “Handling more inventory means you need bigger warehouse space. You have to pay more salaries, more rent, more utilities.” By Garrison’s calculations, K. Bell’s cash flow could increase by $150,000 in the coming year if the company follows this recommendation.

Of course, Bell wants to increase sales and thinks the most logical place to do that is with the company’s existing retail customer base. The consultants agree.

A network of independent sales reps sells the K. Bell fashion line to retailers in eight territories nationwide. With some exceptions, Bell is dissatisfied with the reps’ performance.

“Our retail customers are not buying enough of the entire K. Bell line,” Bell said. This year she set a goal for the reps: Their sales volume should increase by 25% over the next 12 months.

Bright and Garrison said it is best to establish a formal review process in which the company sets sales targets to be met by specific dates.

“That way, if they don’t meet the goal on the first season, you can intervene and find out why,” Bright said. After that, it’s cold, hard business: “You set time frames. If they don’t meet the goal, they’ll know they’ll be out of there,” she said.

Running a small, thinly staffed company and being the mother of two young children hasn’t left Bell enough time to explore her company’s full potential.

“My biggest frustration is I don’t get out to our stores enough to look at what other hosiery companies are doing,” she said.

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Bright suggested Bell consider hiring a West Coast sales manager to relieve her of some of the day-to-day load, but Bell was reluctant to take on the expense, at least until the company is stronger financially.

“We’ll explore other options first,” Bell said.

Despite its small size, K. Bell has managed to create a brand identity through skillful promotion to the garment trade and consumers. Its name and products routinely appear in apparel trade papers and fashion magazines--a big plus for a company in an image-driven business.

“This gives them the visibility with retailers they need,” Bright said.

But can K. Bell continue in its current groove for years to come? Bright thinks Bell needs to consider establishing new modes of distribution in case the retail environment changes. The company has lost 11 retail customers in the last four years through bankruptcies and consolidation, and the shakeout may not be over, Bright said.

Bell liked Bright’s suggestion to develop a mail-order business targeting working women. Bright believes it would be easy to test the concept before making a major investment. K. Bell could distribute its brochures and catalogs at a women’s business group meeting and gauge reaction before committing resources.

Bell doesn’t believe it’s realistic to implement all the suggestions right away, but she hopes to eventually consider everything the consultants recommended. She’s confident K. Bell can get on more solid financial footing in the year ahead.

But her ambitions for the firm go well beyond the immediate future.

“I love what I do,” Bell said. “As long as I feel this way, I want K. Bell to go on forever.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Business Make-Over

* Name: K. Bell Inc.

* Headquarters: Culver City

* Type of business: Designer and distributor of fashion hosiery for men and women

* Status: Private

* Owner: Karen S. Bell

* Revenue: $4 million in fiscal 1996; $5 million estimated for 12 months ended June 30, 1998

* Financing: $370,000 bank credit line

* Employees: 15

* Founded: 1983

* Product brand name: K. Bell

* Retail customers: Nordstrom, Marshall Field, Wet Seal

Main business problem

Needs to increase sales and profitability.

Goal

Improve gross profit by 5%

Recommendations

* Change banks.

* Establish a letter of credit.

* Try to establish trade credit with all suppliers.

* Accelerate inventory turnover to six times a year from four.

* Establish formal review process and goal-setting for sales representatives.

* Consider hiring a West Coast sales manager.

* Consider creating a mail-order business directed at working women.

Meet the Planners

Jeff Garrison, CPA, is a business consultant at Santa Monica-based Stonefield Josephson, which provides accounting, auditing, business consulting, management and reorganization services. He and the firm have extensive experience in the apparel and fashion industries.

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Lee Reinke Bright, founder of Bright Marketing International in Long Beach, is a public relations and marketing veteran, frequent public speaker, and author of “The Bright Marketing Workbook,” a guidebook on creating a small-business marketing plan. She is the former public relations director of the California Mart in Los Angeles.