Date August 2015
Approximate net recovery on cost
- Online sales of furniture and bedding grew approximately 14% between 2013 and 2014, while retail sales through all distribution channels grew less than 3% last year
- Industry revenues: $50 billion (U.S.)
- Major product categories: Upholstered furniture, mattresses, case goods, office furniture, children’s furniture
- Significant companies: Ashley Furniture Industries, Bassett Furniture, Haverty Furniture, La-Z-Boy, Rooms To Go
- Market share of top: The 50 largest companies generate approximately 35% of revenue
- Recent sales trends: U.S. retail sales for furniture and home furnishings stores increased 5.4% in the first six months of 2015 compared to the same period in 2014
Special orders necessitate special appraisal considerations: Due to the customized nature of furniture retailing, customers typically place deposits on ordered furniture and schedule delivery for a later date. As a result, a significant portion of inventory may have some type of customer commitment, creating a unique set of appraisal assumptions. Depending upon the level of customization available, home furnishing retailers’ stock ledger reporting may include buckets of inventory with a partial deposit against it. Subject to individual lender requests, there are multiple ways that this inventory may be treated in an appraisal. One method is to assume that inventory with deposits placed on it by customers would be available for sale in a liquidation, as these would be considered unsecured funds in a bankruptcy filing, thus appraisal gross recovered dollars would include this inventory. Additionally, furniture retailers typically track fully paid (customer-owned) special orders in process or pending delivery. In this circumstance, a lender may opt to deem this inventory ineligible to the Borrowing Base or create a reserve for the total deposit amount collected, as a bankruptcy filing and subsequent court-authorized liquidation may entitle the customer to collect the paid inventory or to be refunded the total deposit amount, depending upon district rulings. One additional note regarding customers paying for goods by credit card; in this circumstance, customers who do not receive their goods as a result of a bankruptcy filing, can and most likely will, dispute the charge for failure to receive the goods . The credit card processor will in turn, refund the customer and withhold remittance of those funds to the company. Gordon Brothers typically assumes that in a going-out-of-business (“GOB”) scenario, all furniture items would be sold “as is” and special orders would not be accommodated. The lack of customization options available to GOB customers is reflected in the level of discounting extended.
Delivery important to maximizing value: Although special orders and product customization may not be extended in a liquidation event, home delivery service most likely would. Due to the item size and bulk of many furniture items, in addition to the relative inconvenience that self-pickup would represent to the majority of customers, Gordon Brothers' appraisals typically assume that deliveries to customers would continue in a liquidation scenario, at the customers’ expense. Continuing delivery service also provides an additional incentive for customers to purchase goods in a liquidation. Absent this optional service, gross recovery values could be negatively impacted, especially on large furniture items such as sofas and case goods.
Sample goods impact on gross recovery values: Due to the nature of furniture retailing, a percentage of on-hand inventory will be comprised of sample goods on display in a showroom setting. This inventory is susceptible to the wear-and-tear common to floor sample inventory and may require deeper discounting in order to entirely sell through. Similarly, furniture retailers often have discontinued or damaged items, broken sets (e.g. a dining room table with no chairs), or special order returns on-hand, which may be offered on clearance. When completing the appraisal analysis, it is important to understand the percent to total inventory sample inventory represents, as the gross recovery on these goods is typically lower than that of first quality goods. Similarly, it is important for lenders to monitor levels of sample inventory on an ongoing basis as significant increases in aged or damaged samples may present challenges in a liquidation.