May 14,
2012 by in UnCategorized 
By Home Furnishings Business in on May 2012
Most of us learned at a relatively young age the importance of building and maintaining a strong, personal credit history. For most of my generation, that knowledge hit in college sometime around the first semester when all the credit card companies were doling out applications at the campus book store.
It really seemed very simple. Fill in the application, mail it in, and lo and behold, about four weeks later, the plain envelope arrived containing that magic piece of plastic.
My friends and I viewed that tiny plastic sliver as freedom. Freedom to buy clothes, shoes, food, and all the extra joys of college without having to hit up Mom and Dad for extra funds. Just one more taste of freedom to be found in that first year away from home.
As a college freshman, it was a glorious thing, and for me, that first card arrived during the days of easy credit. Basically all it took was a street address, a social security number and a predicted year of college graduation. Easy cheesy.
Simple money; simple times. And, a very eye-opening, educational experience in the way credit works for a naive freshman. Thankfully, I had understanding parents who took the hard line with me when it came to digging out of the indebted hole in which Id put myself in pretty short order.
Nope, there were no handouts from the money gods; instead, I hit the pavement in search of a part-time job that meshed with my class schedule. With that jobin retail, by the wayI slowly dug myself out of that hole and learned a valuable lesson in managing personal credit, money and budgets.
I did watch those same friends (whod accompanied me on many shopping trips and dining-out adventures) get those parental handouts for their personal bailouts. Over the years, Ive seen those same friends struggle to maintain budgets, personal credit issues and other financial matters. Whos to say if my parents had jumped in and paid off my debt whether Id be in the same proverbial boat as my college pals?
Fast-forward to today and the business sector and the credit crunch. By no means is the furniture segment being bounced around like a hot potato by banks and financing companies like we saw a few years back starting in 2008. Its still no cakewalk for credit, but by all accounts, lending for furniture retailers and the consumer seems to be loosening some.
Banks and lenders are still cautious, mind you, but at least now, companies with the word furniture in their title or business description arent treated as if theyre tattooed with a scarlet letter. For the last few years, the furniture segment has been ostracized by banks leery of the housing market, leery of the state of the furniture industry, and just plain leery of lending dollars or extending credit. That was painful!
In addition to being a bit more furniture-friendly, lenders seem to be loosening the belt on consumer credit, too.
Thank goodness!
As we all know, home furnishings purchases are right up there behind homes and automobiles as the most expensive purchases consumers make. Without reliable consumer credit, those purchases are not likely to be made. A big cash outlay for most consumers isnt likely in these still-rough economic times, but the ability to spread out payments over a year or so makes the purchase easier.
During the last few years, consumers have also gotten a bit wiser in the use of credit cards, making it easier for banks to offer credit.
In this issue, weve talked with lenders and retailersall willing to share their stories and opinions on the state of the credit market for furniture retail.
Enjoy the read, and heres to learning where we as an industry are heading in the lending area.
May 14,
2012 by in UnCategorized
By Home Furnishings Business in on May 2012
It might not feel that way for a lot of furniture retailers, but their ability to get and maintain the credit they need to run or expand their business appears to be improvingsome.
Many lenders are still holding their cards close when it comes to home furnishings retail, especially if a store hasnt been profitable, or doesnt have a plan to make money and grow sales.
Joe Milevsky, CEO of home furnishings retail consultancy JRM Sales & Management, Acworth, Ga., said lenders are still pretty tight when it comes to extending credit to furniture stores.
Its maybe a little better, but still restricted, he said. If you need it, you have a hard time getting it.
He did say hes seen situations where banks have gotten more aggressive with some of JRMs more established, successful retailer clients when it comes to approaching them to extend funds.
If someones struggling, though, I dont see it getting any betterI see it getting worse, he said. What we do is so tied to the housing market, and until the housing industry improves I believe credit will stay very tight (for furniture retailers). We have so many clients who are having record yearssome even through the recessionbut the banks are still afraid because its so tied to the housing market.
One problem is that many furniture stores dont have very good numbers of late to bring to their credit negotiations with lenders.
Say youre a store and you want to expand, refurbish or buy a store down the street, said Jerry Epperson, managing partner with Mann, Armistead & Epperson in Richmond, Va. The banks going to look at your numbers the last three or four years, how youve done. Even if youre a survivor, even if youre gaining market share ¦ you might have to put a few more rocks in the box before banks are pleased as punch to provide what you need.
Fortunately, he added, banks seem to be relenting on some of the more draconian methods theyve used to secure debt owed by home furnishings retailers.
One of the most dastardly things I saw around late 2009 was good retailers, people whod always made money, the banks wanted the family to put its personal assets up to keep the line of credit, Epperson said. A lot of people decided to leave the business rather than do that.
With improved retail performance, he said theres not as much pledging of personal assets for businesses that have been successful over the years.
A LESS JAUNDICED EYE
I think banks feel better about the retail environment, especially since spending has held up pretty well despite limited income growth, said Mark Vitner of Charlotte, N.C.-based senior economist Wells Fargo Securities. Consumer spending is up for big tickets, mostly autos, but some of thats furniture. A lot of people had put off major purchases during the recession, and now that layoffs have slowed, spending has picked up.
Accordingly, Vitner said the credit crunch for some retailers has eased considerably as the economy improves, but its still not easy to get a loan or expand a line of credit for many stores.
Deliquencies continue to fall, and credit quality continues to improve, but (banks) arent loosening their credit standards that much because of inconsistency in the economy, improvement is so tentative, he said. When you look at the fundamentals behind consumer spending, theres been no real income growth the last two years. The gains weve seen in spending arent sustainable without stronger income growth.
Theres money to lend, but few banks are willing to loosen up a lot, Vitner said. Theyre lending money, but not loosening the underwriting standards. For that to happen, the economy has to ramp up a notch, or more banks will eventually clean up their own balance sheets. Parts of the banking system have recovered from the recession, but the entire system has not.
MONEY STARTING TO FLOW
Loans from Bank of America to small businesseswhich fits the profile of a lot of furniture retailerswere up 20 percent last year over 2010, to $6.4 billion.
Don Vecchiarello, who handles media relations for small-business-related topics at Bank of America, said small business is a great opportunity for us, and its a market thats starting to pick up some momentum as the recovery continues.
With small businesses financial condition and performance improvingalbeit slowlywith the leveling off of the economy, more of those companies are eligible for and requesting credit at BOM.
In addition, we have more people meeting with small business owners every day, Vecchiarello said. Since late 2010, we added more than 800 small business bankers who are consulting with small business owners at their place of business, assessing their companies deposit, cash management and credit needs.
In total we have more than 1,500 bankers, client managers and contact center associates who are 100 percent dedicated to serving the needs of our small business clients.
Bank of America is keeping up the pace it set last year through March.
In the first three months of 2012, we extended more than $1.7 billion in new credit to small businessesan increase of 21 percent over the same period last year, Vecchiarello said. Importantly, we have also seen an increase in small business owners usage of their lines of credit for the first time in three yearsa key indicator that deleveraging is slowing and demand for lending is up.
In addition, our combined new and renewal small business lending totaled more than $3.6 billionan increase of 14 percent over the same period last year.
Bank of Americas basic underwriting standards have remained consistent, he added. Borrowers need to show that they have the cash flow needed to repay a loan, as well as a secondary source of repayment and a solid track record running their business.
Those secondary sources can be hard to find, or have less value. Say youre using inventory to help secure a loan.
The most you could ever get on inventory is about 80 percent, Epperson noted. In 2009, 2010 everybody had all this stuff to get rid of. We dont have that problem so much nowinventories are getting back in line. Its better than the 50 percent you might have gotten (on inventory) in the middle of the mess.
Bruce Selik, CEO, Hillside Furniture in Bloomfield Hills, Mich., is understanding of banks worries about securing lines of credit or loans. He believes the nature of home furnishings retail as a business can make it a hard sell to lenders.
What I hear from credit institutions is they dont like lines of credit based on inventory because that can be here today, gone tomorrow, he said. And look at our buildings. Furniture stores, in Michigan anyway, have a smaller amount of parking spaces per square foot (of floor space) because of the nature of our businesswe have large products. If youre a drug store and have 10 customers inside, thats not going to support a lot of business. If we have 10 customers in the store at once thats pretty good.
If banks loan a business money A, on inventory; and B, on a building, that building needs to be able to be used for anything, and a lot of furniture store locations are appropriate for furniture retailing only.
WORD FROM RETAILERS
Home Furnishings Business asked a number of retailers to rate their ability to obtain operating lines of credit compared with a year ago.
Selik said Hillside has been fortunate over the past couple of years in that it had few if any problems with the status of its line of credit. CEO Bruce Selik credits that to giving his bank no reasons to worry.
Thereve been no problems, because Ive had a line of credit with the same bank for almost 20 years, he said, though he does understand that longstanding relationships didnt keep other retailers from losing their line of credit.
We deal with a Michigan bank, not a Bank of America or something like that, and I think that helped, Selik added. That, and the fact I made money every year. When sales went down, I adjusted the business to stay profitable each year. I never gave them any need to worry.
El Dorado Furniture, Miami Gardens, Fla., also has been fortunate not to have to go outside to finance its inventory or growth.
However, I do hear other retailers having somewhat of a hard time getting credit or paying a bit higher rates because of the risk factor in paying it back, said Pedro Capo, CFO.
Belfort Furniture in Dulles, Va., changed banks last year. Rick Petry, senior director of finance and administration, found looser covenants and a lower interest rate compared with before, calling the negotiation experience a good experience overall.
My line of credit is set for two years, so I havent renegotiated this year, but I dont think wed have a problem if I did, Petry said. I found the process fairly competitive. We had four banks bidding for our business. That works if youre showing growth, showing progress in your business plan.
Stephen H. Kidder, past chairman of Home Furnishings Independents Associations (HFIA) board, reported that credit is easier to come by at his Superstore Furniture Sales of Williston, Vt., although he said his company hasnt needed to borrow money.
The store maintains a good relationship with its bank, however, for when or if it needs to borrow funds.
In areas facing higher-than-average unemployment and where business conditions have been slower to recover, credit is still very tight for a lot of furniture stores.
Thats been the case for Verona Mair of The Emporium in Ponca City, Okla., where some potential customers are leaving in search of better employment prospects.
Credit is harder because banks arent open with their money even though they are making money, she said. And, there are fewer places to get funds. If you have money, you can get money.
Hilmar Starcke at Starcke Furniture, Seguin, Texas, said his access to credit is about the same as it was a year agoand thats not good.
Until there are directives from (Washington) saying to make credit more available, we will see no change, he said. We arent a good bet on paper. Banks dont like to do collateral-based lending like they once did. They only want positive cash flow and profitable business. I wish I knew a counter argument, but I dont.
LOOKING AHEAD
Because of his buying group, Dale Dodd of Dodd Home Furnishings, Guin, Ala., says he has a little better access to operating lines of credit, and he sees more credit getting freed up to retailers this year due to market economics.
It will continue to get better because of increased competition for business, Dodd said.
Retailers again had a mixed bag when they responded to questions about how they see their credit environment evolving over the course of 2012, especially when it comes to financing expansion or major store renovations.
Hillside Furniture does a lot of remodeling but its more on the lines of new paint and other tweaks that dont demand a loan to complete.
I can tell you from talking to financial people, though, that banks are willing to go out on a limb a little more than a year ago, Selik said. We see it easing up a little on that side of the fence around here. Detroits tied to the car industry, and thats recovered.
Capo at El Dorado doesnt believe the situation will get any better than it is right now over the course of 2012.
Companies that were seeing growth by leaps and bounds will have to adjust their growth plans because they will not be able to get access to credit for their expansions or remodeling, he said.
It doesnt look very promising in Oklahoma either, said The Emporiums Mair.
Some business consultants are even advising entrepreneurs to not go into business for themselves, which is at odds with what has been the American way to prosperity, she said. Vendors are pushing terms or are going the opposite direction by asking that orders be paid for with company credit cards so they get their money faster.
Starcke doesnt see much improvement this year in his Texas market.
There wont be any more money than today and lending guidelines will continue to be restrictive, he said. The home furnishings industry is down something like 11 percent from 2007 so we dont meet criteria for a good lending situation. In fact, industries that look like ours on paper dont offer good lending opportunities.
Kidder at Superstore Furniture Sales thinks lenders will loan, but keep a tight leash on borrowers.
Credit will continue to be available, but banks are conservative and will want as much as 40 percent equity to make loans, he said.
At Belfort Furniture, Petry believes credit availability isnt specific to furniture as a retail sector, as it is specific to individual businesses.
I think it will be fine for us because we always show net income at the bottom line, he said. Even if your revenue decreases, if you can show youre managing the business for profitability you should be fine.
EXTERNAL FACTORS
What are some larger economic or political issues that would constrain or expand the availability of credit to furniture retailers?
Selik believes the answer is simple.
A, God forbid, another real war with somebody, like Syria, he said. B, another attack like 9/11 here. Id really hoped (on) that September 12 that the stock market wouldnt crash, that the markets would tell these people that they couldnt dictate our economy, but thats not what happened.
And especially for us here in Detroit, were tied to the car industry, and with that its the old storywhen its good its great, and when its not so good its horrible.
The government could do something to loosen credit up but Capo isnt holding his breath.
If I was in a position where I would have to wait for government to act for my business to prosper, I would forget about the government, he said. And I will look at my overall business model to reflect the current market conditions that exist, and I would take it from there.
He added that while he loves it when customers come to El Dorado and buy furniture, he acknowledges that many were in debt up to their eyeballs.
They just kept on buying, same goes for retailers; they were expanding like crazy with money that wasnt theirs (borrowed money), Capo said. I think there needs to be a new and revamped process of how business should be conducted; that includes other elements for what-if scenarios, like the one we just went through in this crisis.
And, of course, its an election year with everyone wondering about the White Houses impact on the business environment in the wake of November.
Well have uncertainty there, said Belforts Petry. Im still not convinced were out of the woods with the economythere are still a lot of hiccups.
The housing marketthats so important to what we doand unemployment will still be a drag on the economy in 2012, but we are in a good area as far as a lot of that goes.
Kidder echoed the importance of housing to the health of the furniture industry.
Home furnishings sales improve when housing improves, and one in seven houses are emptywow, he said. Foreclosures still high. Housing weighs down banking and home furnishings industries. Consumers who borrowed against their houses or took equity out have to have that all work through the system before their situation gets better. However, consumers seem to be trading up, buying better goods, which indicates improvement.
Also, with the state of the housing market over the past few years, any recovery is more likely to involve people buying real homes, not speculating on a property for a quick flip, and thats a lot more conducive to buying furniture.
Within the industry, Mairs concerned that furnitures far-flung sourcing poses a risk that could effect retailers healthand credit worthiness.
A disruption of product supply lines would be bad, she said. We need to be less dependent on imports so we can expect and get dependable quality and expected availability.
Eppersons a little concerned about the growth numbers the industry can show over the course of the year.
We had a really good fourth quarter, a really great MAY and February, but overall sales coasted after Presidents Day, he noted. Most economists agree (that) well see economic growth between 2.5 and 2.6 percent this yearit was 2 percent in 2011, 0.9 percent in 2010.
If you had 3 percent growth in the fourth quarter and 2 percent in the first quarter, youre looking at a slowdown. The warm winter probably influenced a lot of housing activity and kept people out of the house shopping.
The moneys out there to lend, but the banks certainly havent turned the tap on full bore.
The truth is, if something would occur that gave corporate America a little more self-confidence, they would have a tremendous amount of money available to use, Epperson said.
When theyre ready, they might find furniture stores that survived the recession are better credit risks than in pre-recession days. Ironically, Wells Fargo Securities Vitner noted, it made a lot of them better businesses.
The severity of the recession scared a lot of folks, and they ended up tightening their own terms, making sure they werent caught sitting on a lot of inventory, he said. HFB