If the ground feels just a little more shaky underfoot, call it The Silicon Valley Bank Effect.
Even as the US federal government has stepped in to avert a broader financial-system meltdown — by granting depositors access to all their funds after a run on the start-up-friendly bank — new problems abound for the fad.
It’s a bit of a banking crisis that has the potential to hurt both sides of the fashion business, with companies racing to double-check their finances and consumers potentially becoming more cautious.
“Obviously everyone is concerned,” said Gary Wassner, chief executive officer of Hilldun Corp., which helps fund many designers. “When things like this happen, it creates more uncertainty in an already uncertain environment. Many worry about what, if any, repercussions might follow. Instability creates doubts and worries.
“When it touches the banking system, it creates concerns about the basics that most people take for granted, so the concerns are key,” Wassner said. “I’ve had many clients ask me what it means and what it might foreshadow.”
Wassner described it as “just another bump in the road” – but the question that lingered earlier in the week was how bumpy could the road be ahead?
President Joe Biden tried to allay fears on Monday with a short speech before the market opened.
“The banking system is safe,” Biden said from the White House. “Your deposits will be there when you need them. Small businesses across the country that had deposit accounts with these banks can breathe easier knowing they will be able to pay their workers and pay their bills.
He also said that the management of SVB and Signature Bank, which was also taken over by the government after being duped by cryptocurrencies, would be fired and investors who took a risk on the banks would lose their money.
“That’s how capitalism works,” he said.
However, retail investors weren’t taking any chances on Wall Street.
As the Dow Jones Industrial Average fell a modest 0.3%, or 90.50 points, to close at 31,819.14 on Monday, fashion was hit especially hard. Among those in decline were Kohl’s Corp., down 8.1% at $22.82; Allbirds Inc., 8% at $1.15; Under Armor Inc., 7.5% at $7.26; Nordstrom Inc., 7.5% at $16.87; G-III Apparel Group, up 5.2 percent to $15.02, and Abercrombie & Fitch Co., up 5 percent to $25.62.
While concern over the weekend was that startups that filed their payrolls in SVB would suddenly be unable to pay their employees — a concern the Biden administration has now covered — there was some another relapse.
The already-struggling Stitch Fix Inc., for example, has found its financial cushion diminished, noting that it doesn’t expect to have access to SVB’s $40 million share of a $100 million revolving credit line, according to a filing with the Securities and Exchange Commission.
Stitch Fix has no plans to draw on that line of credit and said it has sufficient cash to cover any working capital needs.
That was enough to satisfy investors, who sent shares of Stitch Fix up 4.4% to $4.96 on Monday.
But also the styling service – and the rest of retail – now find themselves selling to a customer base shaken, tired of crises and already strained by high inflation.
“Consumers don’t like risk, they don’t like volatility,” said David Bassuk, global retail practice leader at AlixPartners. “THE [stock] the markets know how to read it and for this reason the markets are turbulent.
“What we’ve learned from the past is that when there’s a crisis of this nature, consumers really balk, they’re extremely reactive to that,” Bassuk said. “The contractions around spending are real and significant and the consumer, his psyche takes over.”
But Bassuk, relying on a study of the last six major crises dating back to the 1987 stock crash, said consumers retreat quickly, but bounce back just as quickly.
“We have to be prepared for this,” he said.
Hopefully the problem will pass quickly.
Advisor Hemal Nagarsheth, a partner in Kearney’s financial services practice, said SVB “was not representative of many other banks” and that there was no sense of “contagion”, in which its failure would spread widely across the financial system.
“They were quite different in many ways,” Nagarsheth said. “It was a top-tier bank. Some people say they were always attracting money that may not have been very stable to begin with.”
Even so, he said it’s a good time for companies to take a close look at what kind of risk they and their partners are taking.
That goes double for areas like cryptocurrencies, 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?'” said Nagarsheth. “What have you done to make sure everyone is aware of who you depend on and what your risk is, especially if you’re looking at something that isn’t mainstream? Cryptocurrencies are just one example.”
So while fashion’s accounting departments poring over their books just in case, the rest of the industry can cross their fingers for now.