Credit woes alter marketing tactics

By Clint Engel -- Furniture Today, August 24, 2009

High Point — Furniture retailers are coping with the continuing tight credit environment the same way consumers are dealing with it.

They're tightening their belts, cutting back their debt, making do with shorter lines of credit when they need to and, when they can, securing the financing they need to get through tough times.

On the marketing side, consumers are no longer interested in long-term no-payment, no-interest promotions, so retailers are leaning more heavily on other hooks to get traffic through their doors.

"The no-interest, no-payment (offer) has gotten very expensive and most of our retailers have tracked away from it because of the cost," said Michael Allen, executive vice president of home furnishings for buying group AVB/BrandSource. "And frankly, the finance companies want to see the consumer making regular payments."

BrandSource retailers still offer extended-term promotions during certain periods, such as holidays, but nowhere near as regularly as in the past.

"Instead, we've done some other interesting, old-school things," Allen said, such as offering a free gift with a purchase. Dealers also are using gift cards as purchase rebates, something Allen said has been "wildly successful."

"The nice thing about that is it gets the customer back in the store."

Recently, BrandSource ran a "Spring Cleaning Sale," in which consumers could register to win a year's worth of free housecleaning. It was one of the best events BrandSource has ever done, Allen said.

Like many others in the industry, the buying group's retail members have struggled with the contraction in consumer credit. BrandSource offers its own private-label credit card program through GE Capital, and in November and December of last year the credit approval rates were "just horrible," Allen said. At one point, they dropped as low as 20%. Approvals have since clawed back — to about 70% — and Allen now thinks the earlier turndowns were a bit of a knee-jerk reaction by credit providers fearing the worst.

BrandSource also offers an inventory financing program through GE Expert Finance, providing credit lines to all of its members, including the 750 or so retailers that carry furniture.

Allen said this program has been an important tool for members for about 10 years. And it's a selling point when BrandSource goes after new members who are facing increased pressure from their own lenders and factors, such as the struggling CIT.

In this challenging environment, BrandSource has been gaining new members — 16 in July — as smaller independent retailers look for somewhere to go for credit and other services. But its lender has toughened its criteria for new dealers, Allen said. The new enrollees must have decent personal credit scores and the lender makes them sign personal guarantees.

"That's not to say they're not approving people, but in the past, if you had a pulse and could fog a mirror, they would give you a credit line," he said.

Miskelly Furniture, in Jackson, Miss., has generally resisted carrying debt, but about a year ago, when it was finishing up its Ashley Furniture HomeStore and a warehouse expansion, it needed to borrow some money.

Miskelly's owners — brothers Chip, Oscar and Tommy — decided they would issue a bond at just about the same time the nation's bond market was collapsing, said Oscar Miskelly.

They ended up going the route of traditional bank financing, he said, and probably ended up paying a slightly higher interest rate. In addition, given the economic climate, Miskelly recently secured its first-ever $10 million revolving loan by pledging some real estate against the debt.

"We haven't had to draw against it but you want to have a cushion," Miskelly said.

In recent weeks, the promotional to midpriced retailer has seen improvements in business as the stock market has recovered from its lows and the housing market has "come off the mat."

But Miskelly said he's not expecting consistent improvements until the fall of 2010. The economic hole is too deep, he said, and recent statistics on credit, home foreclosures and unemployment seem to back him up.

The U.S. Commerce Department said July retail sales (stripping out autos, gas and restaurant sales) decreased 0.6% from June and were down 5% from a year ago. Earlier this month, the Federal Reserve reported that consumer credit fell for a fifth consecutive month in June by $10.3 billion, or 4.9%. Revolving credits — including credit card debt — decreased by $5.3 billion or 6.8%, as consumers continued to rein in spending.

"Consumers are much more conscious about debt," he said, adding that he believes the change is being driven more by consumer preference than by banks tightening up on them.

While Miskelly still offers special financing — up to one year with monthly payments, the retailer is seeing more interest in other types of promotions, such as $100 off a purchase of $599 or more.

"Events that are quantifiable as far as a discounts go seem to be more attractive to consumers than longer-term credit offers," he said.

Simon Kaplan, CEO of Dayton, N.J.-based Crest Furniture, which operates Value City Furniture and Ashley Furniture HomeStores in New Jersey, said Crest's lender has cut its credit line and "thrown a few fees in there."

"But overall (the changes have) been reasonable (because) we're very conscientious about our bank covenants."

The lower credit limit also hasn't been an issue because the company runs a tight ship and has been diligent about ringing out waste, he said. For instance, the stores have gone from a five-day-a-week delivery cycle — with a lot of overtime — to four days with 10-hour shifts. Crest sends out the same number of trucks per week, but it's doing the work in one less day and without excessive overtime pay.

"The world is going to be the survival of the fittest, so work on being the fittest," said Kaplan.

According to Ashley Furniture CEO Todd Wanek, "There's no question the credit constraints have caused major problems within our industry."

These include falling credit card approval rates and shrinking or troubled credit resources, such as CIT and American General Finance. The latter, part of the troubled AIG, left many stores hanging earlier this year when it essentially packed up its consumer credit program for the industry. (An AIG spokesman told Furniture/Today in May it was "curtailing our retail program here," but would not say how many furniture retailers were affected.).

Wells Fargo was cited by some retailers contacted for this story — including Miskelly — as a lender that has stepped in to fill the void.

"You cope by looking at other promotions less focused on finance and more focused on product and price," Wanek said. There's always a blend of deferred financing in HomeStore promotions, but the financing story isn't the headline anymore, he said.

More often, HomeStores are playing up offerings such as a free television with furniture purchase or a chance to win a free trip, he said.

On the operations side, Wanek said he believe many retailers are being impacted by the lack of credit available for infrastructure improvements, but added that this is the perfect time to go after market share.

"The good retailers are finding a way to grow during this time," he said. "They're taking a very aggressive approach toward their businesses and promoting their products and companies."

Atlanta-based Havertys prepared early for this downturn by getting out of debt, said Chief Financial Officer Dennis Fink. The company paid off its term debt this past fall (reducing the level to zero from $50.5 million owed at the end of 2006).

In this environment, "People who are not leveraged are in better shape than people who are," Fink said, "because it's so hard to get financing now other than on a secured basis."

In December, Havertys switched out of an unsecured revolving credit facility and into an asset-based revolving line. Fink said the change was important because there are no strict financial covenants with the asset-based line. The availability of funds is determined by the quality of Havertys' assets, particularly its inventory.

In a second-quarter conference call with the investment community, Fink noted that Havertys had nearly $40 million available on the $60 million revolving line. "Our financing arrangements are adequate to endure a longer downturn than we hope will be necessary," he said about the strategy.

As for consumer credit approvals, Fink said, they are "holding up pretty well." He attributed that to the fact that Havertys sells better-end goods and generally attracts a more affluent consumer with good credit.

Bob Saquet, president of Eggers Furniture in Middleboro, Mass., said his business has always avoided long-term financing promotions and, as a result, hasn't seen the kind of credit approval problems so many other retailers have experienced. Indeed, third-party financing accounts for less than 5% of Eggers' overall sales.

When the company does run a finance promotion, it's a 90-day offer with equal payments.

"I've never done 'no, no, no' because when I became aware of how it works, I determined it was not in the consumer's best interest," he said.

The big catch with many of these plans is an exorbitant interest rate that consumers wind up paying retroactively if they haven't paid their bill off by the end of the term, he explained.

As for Eggers' own business financing, Saquet said, he's in the same boat with many other retailers dealing with banks that want to cut back credit lines.

"Right now, bankers don't want to talk to anyone," he said.

"We're making due with current resources," he said. "I'm not driving a new car. I'm not taking a summer vacations and I haven't bought a new suit in two years. But I still take my wife out to dinner once a week."