Date February 2020
- Year-over-year sales for U.S. furniture and home furnishings stores were up just slightly at 0.3% for 2019 over 2018.
- New, seasonally adjusted U.S. home sales, an indicator of furniture and housewares sales, were up 7.9% for January 2020 over the prior month and up 18.6% over January 2019, indicating a robust market for most regions of the country.
- U.S. furniture stores’ revenue is expected to increase at an annualized rate of 1.1% through 2024 as per capita disposable income increases.
- Tariffs of up to 25% remain in place for many home furnishings, accessories, and textiles imported from China.
Approximate net recovery on cost
Mixed retail performance: With year-over-year sales for U.S. furniture and home furnishings stores up just 0.3 percent for 2019 over 2018, some retailers have struggled to remain relevant in an increasingly competitive and price-conscious environment. The housewares and home furnishings sector has become significantly competitive as mass merchants like Target and Walmart and off-price retailers like TJX Companies’ Home Goods and Homesense have grown and expanded their affordable furniture and home accessories collections in stores across the country. The sector has also been hit hard by the rise of online retailers including Amazon and Wayfair, among others. In addition to increased competition, the sector has been stressed by ongoing tariffs as home furnishings, textiles, tabletop items, and home accessories are some of the most heavily imported products from China. The Phase One Economic and Trade Agreement with China that was signed on January 15, 2020, suspended some List 4B tariffs and reduced some from List 4A, however hundreds of furnishing components and related items are still subject to tariffs of up to 25 percent.
Several national and regional store-based home furnishings retailers struggled in 2019 to remain competitive and profitable, including Pier 1 Imports, Art Van Furniture, and Bed Bath & Beyond.
After years of falling sales and store closures, Pier 1 Imports filed bankruptcy in February 2020 after announcing in January that it would close 450 stores including all of its Canadian stores. For the quarter ended November 30, 2019, sales at Pier 1 stores open for at least one year decreased 11.4 percent compared to the same period in 2018, with year-to-date comps down 12.5 percent. Bed Bath & Beyond has also struggled over the past year, with eight-quarter average comparable stores sales down 3.3 percent through November 30, 2019. In late February 2020, the company announced a restructuring program, in conjunction with its ongoing rightsizing efforts, through which the company plans to reduce its headcount by 500, with the overall initiative expected to save $85 million in operating expenses. Traditional furniture retailer Top Midwest furniture and mattress retailer Art Van Furniture announced in March 2020 that it is shutting down and will begin liquidation sales at all of its company-owned stores in Michigan, Illinois, Missouri, and Ohio beginning March 6, 2020, citing a challenging retail environment as the reason for the chain’s liquidation.
There are some positives for the sector as retailers including Williams-Sonoma’s West-Elm and Pottery Barn brands and Restoration Hardware have performed well in recent months. West Elm continues to expand its store count and reported 14.1 percent same-store sales growth for the quarter ended November 3, 2019. Pottery Barn also generated positive sales of 3.4 percent for the same period. Restoration Hardware has faced less mainstream competition because of premium locations and higher average price points. The company generated positive comparable stores sales of 2.1 percent (eight-quarter average) and generated higher gross margins for the total 12-month period ended November 2, 2019 over 2018. Online retail giant Wayfair continues to show topline sales increases and has gained market share from traditional furniture retailers, although its profitability model has been challenged by significant growth-mode spending as it takes market share from Pier 1 and Bed Bath & Beyond.
Special orders necessitate special appraisal considerations: Because of 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 on the level of customization available, home furnishing retailers’ stock ledger reporting may include inventory with partial deposits against it. 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.
In the case of credit card purchases, 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 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. Because of the 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, but 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.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: fred, U.S. census bureau, homesense, williams-sonoma, creditntell, str trade, business insider, cnn, clickondetroit