Credit challenges continue
2010 likely to yield more of the same
By Clint Engel -- Furniture Today, December 21, 2009
In this story:
Being proactive
Changing the rules
A squeeze on factoring
HIGH POINT — For more than a year now, the furniture industry has struggled in the face of contracting credit markets.
And what’s coming next most likely is more of the same, say industry sources — the survivors of the weakest economic climate in decades. Despite a dip in the unemployment rate to 10% in November and a national home foreclosure rate that has decreased for four months straight, few see this as a solid foundation yet for a sustained recovery.
As a result, at least for the near term, obtaining credit will continue to be a challenging proposition for the industry — particularly smaller retailers and manufacturers. And consumers also will find it hard to secure loans, as no-payment programs fade away and lenders continue to closely scrutinize every application.
This year has been full of twists and turns on the credit front. For example, in the span of a few months, CIT Group — the parent of the industry’s largest factoring company — moved from the brink of failure into a prepackaged bankruptcy from which it now has emerged with $1 billion in funding commitments for its vendor financing and trade finance units.
Some in the industry have stepped away from or at least changed the terms of their financing terms with CIT in the midst of this turmoil — including La-Z-Boy’s England division and Hooker Furniture.
Whether it is forced or voluntary action, consumer credit card purchases are continuing to contract (for the ninth straight month in October). And a new credit reform rule handed down by the Federal Reserve that goes into effect early in 2010 will wipe out many of the popular no-payment financing programs to which furniture retailers have grown accustomed.
According to an October Fed survey of bank lending practices, “domestic banks indicated that they continued to tighten standards and terms over the past three months on all major type of loans to businesses and households,” though the percentage that have tightened standards and terms is down from a peak reached late last year.
Being proactive
Simon Kaplan, CEO of Dayton, N.J.–based Crest Furniture, which experienced some of that tightening earlier this year, believes credit will remain hard to get in 2010, but he adds that retailers can help themselves by taking the initiative and making open and informative presentations to their lenders.
Kaplan, whose company operates Value City Furniture and Ashley Furniture HomeStores in New Jersey, recently met with Crest’s primary banker. The retailer came armed with a six-point agenda that spelled out everything the bank would want to know — including how its stores performed this year, what it expects to do in 2010, even information on recent problems and what the company is doing to correct them and improve business.
Kaplan said bank officials weren’t looking for an impressive bottom-line number. They understand the economic climate.
“They were more interested in organization and what we are doing for next year,” he said. “We didn’t blow smoke. We were believable.
“Credit is still very tight, but the relationship, the entire presentation seemed to put them at ease as to being receptive to a reasonable credit line,” he added.
The situation on the consumer credit side isn’t as optimistic, Kaplan said, noting that no-payment promotions through banks are disappearing and will be done away with early next year.
“In my experience, bank credit for small and middle-market businesses is still very tight,” said Jerry Cohen, an attorney with New York-based Cohen Tauber Spievack and Wagner, which works with both industry retailers and suppliers.
“Stricter lending terms demanded by banks and the weaker financial health of potential borrowers are combining to make it pretty difficult to obtain credit.”
That will eventually ease as confidence returns, Cohen said, but it could be a slow process.
“There are alternative forms of financing such as asset-based lending or factoring but they’ve also become more restrictive than in the past,” he said. Then there’s access to “lenders of last resort,” Cohen said — companies that charge exorbitant interest and secure much more in a company’s assets than the amount they’re lending out. He added that he doesn’t recommend going that route.
On the consumer credit side, Bill Hartman, president of the Furniture First buying group, said there is no doubt consumer credit approvals have declined from where they were two years ago — probably by as much as 15%. That’s not helping business and he doesn’t predict much improvement “until the world gets out of a recession.”
“What’s happened to those sales?” Hartman asked when considering whether consumers who fail to obtain credit might pay with cash. “My guess is people didn’t buy.”
Jake Jabs, CEO of American Furniture Warehouse in Englewood, Colo., believes one positive outcome from this recession is “people are saving more.” In his opinion, the trend of consumers living beyond their means wasn’t good for the industry long term.
Jabs said he has never purchased a house with borrowed money. He’s never made a car payment. And his business is debt free. And it’s that kind of philosophy that he believes the industry and consumers can learn from. It’s the kind of safety net that will make AFW a survivor during this recession, he added.
When consumers are finally out of debt and have saved up some money, he said, they will be ready to spend again. But Jabs isn’t expecting any major rebound for furniture in 2010. AFW will grow, he predicts, but it will be through market share gains, not a result of increased consumer spending.
Changing the rules
Earlier this year, when Congress went after the predatory lending and marketing practices of banks and credit card companies, it ended up making business tougher for furniture retailers, said Michael Allen, executive vice president of home furnishings buying group AVB/BrandSource.
Next year, under the new Fed rules, furniture retailers will no longer be able to offer no-payment deferred financing offers through their banking partners, Allen said. Ninety-day interest-free programs are gone, too.
“We just had to make changes,” he said. “Some programs that were very popular for our members are gone.”
Still, BrandSource members have been among the luckier ones in the credit arena. Many other retailers had to scramble to replace their consumer credit card programs after sources such as American General Finance phased out of the furniture industry last spring. But BrandSource’s long-standing private-label credit card program in partnership with GE Capital “is going strong,” Allen said.
“It’s been a terrific tool to offer our members and helps them manage cash flow,” he said.
Allen believes credit issues for the furniture industry have started to moderate. Some players have left the market — American General in consumer financing and GE with most furniture inventory financing — but Allen believes the industry is not in as tough a spot as it feared during the avalanche of scary financial news earlier this year.
Stuart Brister, president and CEO of Wells Fargo Trade Capital, said that in past downturns, he typically saw more fallout among the regional and national retail players than he’s seen this time around.
“As long as this picture holds … and we can finally get consumer spending back, I think many of these retailers will be OK and hopefully, the worst will be behind us,” he said.
But Brister admits that those are pretty big “ifs.” The two wild cards that could sink a recovery are stubborn unemployment, which is not showing many signs of abating, and the risk of interest rates rising, especially mortgage rates.
“Barring some kind of quick return of people to full employment or modest employment, I think it’s going to be a very sideways type of recovery, one that’s not led by the consumer,” Brister said.
A squeeze on factoring
For more than a year, many in the industry have relayed anecdotes about factors tightening the screws, requiring suppliers to increase their share of risk exposure and cutting back on the credit dollars made available to furniture stores. Brister said there now has been a “leveling out,” noting that the strongest players are surviving and getting the support they need and that those companies tend to be the larger and most efficient regional and national operations.
That tightening environment and CIT’s struggles have opened the door to new players, including Tupelo-based Eagle Capital, a factoring firm that serves the trucking industry and entered the furniture fray this fall.
Banks are on the rebound, said Eagle representative Kirk Donnell. But because of everything that’s happened in the financial markets, they’ve “had to go back to the drawing board and revamp the services they offer,” he said.
“A lot of companies were afraid their bank would be gone. Now they’re realizing the bank is there but it’s different,” he said. “They’ve tightened up and changed how they do business.”
That could mean new fees or restrictive procedures and loan covenants. And that’s cleared the way for a company like Eagle, owned by President Joe Estess.
Donnell said his company’s credit approval rate—including the furniture business — is about 97% across the board and that Estess is investing in the industry while others are looking for an exit.
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