Date February 2019
- In December 2018, the Trump administration announced a 90-day hold on plans to raise the tariff rate on $200 billion of Chinese imports, including many that directly affect the furniture industry, from 10 percent to 25 percent
- Year-to-date sales for U.S. furniture and home furnishings stores were up 4.1% through November 2018
- Thirty-seven percent of U.S. consumers will make an online purchase of a large item, including furniture, in the next year according to a recent survey by Goodmind
- New home sales, an indicator of furniture and housewares sales, were up 16.9% for November 2018 over the prior month, but down 7.7% over November 2017
Approximate net recovery on cost
Increasing tariffs on pause: On December 1, 2018, the Trump administration announced a 90-day hold on its plan to raise the tariff rate on $200 billion of Chinese imports from 10 percent to 25 percent. The list of items subject to rising tariffs include various types of furnishings, as well as a wide array of fabrics including wool, cotton, silk and synthetics, yarn, and leather. While news of the hold was seen as a positive by many manufacturing and retail sectors, the tenuous nature of the agreement is giving many in the industry pause as talks between the two countries proceed. National Retail Federation President and CEO Matthew Shay recently commented, “It is clear the administration has heard the voices of those negatively impacted by existing tariffs. We hope this 90-day tariff pause will lead to a positive resolution that removes tariffs altogether and improves U.S.-China trade relations.” Sourcing from other countries, including Vietnam, has become a key strategy for some furniture retailers. After the announcement of the tariff stay, Furniture Today noted “with uncertainty about a more definite trade agreement after the 90 days, don’t expect a slowdown in companies’ efforts to move sourced goods out of China.”
Through the end of last year, tariffs do not appear to have hurt U.S. retail furniture and home furnishings sales, which were up each month in 2018 over 2017. Year-to-date through November 2018, total industry sales were up 4.1 percent over the previous year indicating a still positive marketplace. Nevertheless, even if the tariff rate remains at 10 percent, home furnishing and other retailers face the perpetual challenge of assessing how much additional cost can be passed on to consumers, while working to constrain their own costs of goods. Firms that are best positioned to do this include vertically integrated firms and those that have large buying power and relationships that enable effective supplier negotiations. To the extent that retailers can pass along these costs, and their gross margin and average discount rates remain consistent, NOLVs should also remain consistent.
Lenders should continue to monitor these metrics in addition to comparable and new sales to ensure that customer goodwill remains stable. For those companies that depend heavily on products sourced from Chinese manufacturers, consumer price tolerance remains to be critically tested before customers seek alternatives or refrain from purchasing new products.
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 partial deposits against them. Subject to individual lender requests, there are multiple ways that this inventory may be treated in an appraisal.
Because inventory with deposits placed on it by customers would be considered unsecured in a bankruptcy filing, one method would be to assume that this inventory would be available for sale in a liquidation. As such, 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. In the case of goods purchased by credit card, 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, with the lack of customization options available to GOB customers 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 typically assumes 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.
Gross recovery considerations for sample goods: 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, incomplete sets (e.g. a dining room table with no chairs), or special order returns on hand, which may be offered on clearance. When completing an appraisal analysis, it is important to understand the percentage this inventory represents to total inventory, 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 and second-quality inventory on an ongoing basis as significant increases in this inventory may present challenges in a liquidation.