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Home Goods Sellers Lead Retail’s Default Risk. Why?

While the demand for home goods in the wake of the pandemic has been unprecedented, furnishings companies haven’t necessarily reaped the full benefit of that boom. And that has led to disappointing earnings, reduced foot traffic and even bankruptcy for some home goods retailers.

In fact, according to a recent report from S&P Global, the home furnishing sector was the most vulnerable retail sector. The report used a market signals model, which is more investor sentiment-focused, looking at hard data like industry and country risk, as well as total liability.

“Market sentiment takes into account the volatility of the company’s share price—how does the market see these companies,” said Chris Hudgins, a data journalist for S&P Global Market Intelligence. “And in the analysis we averaged it up by sector, so how many investors see each of these sectors. When you see volatility in the share price, when it drops very quickly or rises very quickly, that’s a signal to our model that something could be more fundamentally at risk here or something could be starting to be seen in recovery.”

The S&P Global report separated manufacturers of home goods from their retail-oriented counterparts. The more manufacturer-focused companies such as Casper Sleep, La-Z-Boy, Bassett Furniture Industries, and Purple Innovation, among others, were scored at a 10.6 percent probability of loan default within a year, on a median basis.

Meanwhile, home goods retailers, which included Bed Bath & Beyond, RH, Haverty’s, and Williams-Sonoma, held a median score of 6.9 percent. Among those companies, Bed Bath & Beyond scored the highest risk percentage at 12.87 percent.

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Bed Bath & Beyond has struggled over the past year, with back-to-back quarterly earnings dips. During the third quarter of 2021, total net sales declined 14 percent to $1.9 billion and comparable sales dropped 7 percent year-over-year, and 4 percent from 2019. CEO Mark Tritton attributed much of that decline to sourcing issues, with the company’s top 200 items impacted to the tune of $100 million in lost sales over the quarter.

According to furniture industry analyst Jerry Epperson of investment firm Mann, Armistead & Epperson, Ltd., the woes faced by home goods companies like Bed Bath & Beyond—as well as Loves Furniture & Mattress and ABC Carpet & Home, which both filed for bankruptcy last year—date back even before the pandemic.

“2019 was a mediocre year at best, and it followed a couple of OK years,” he said. “Then we went into 2020, and when Covid hit everything shut down, including our furniture factories here and abroad.”

Epperson said the shutdowns and supply chain disruptions set into motion at the onset of the pandemic, coupled with increased consumer demand, created a chain reaction that persists even now.

“All of a sudden we had more business than we could cope with, and many of our retailers had cancelled all their orders for incoming merchandise—they didn’t want all that stuff coming in and not have a way to sell it,” he said. “When the consumer had been knocking the doors off for a few weeks, retailers were contacting their vendors, saying ‘I need it,’ but the vendors had closed their factories just like the retailers.”

Once those factories began to reopen, many kicked into overdrive, trying to catch up to overwhelming demand. That amplified production then led to shipping logjams once product made it to U.S. shores.

“During that time, the ports got clogged because too many factories reopened and they all shipped it to the ports at the same time,” Epperson said. “We had so much demand in the U.S., and the Asian factories were building it as fast as they could because they couldn’t keep up.”

During the first year-and-a-half of the pandemic, that demand grew exponentially, spurred by consumers spending more time at home while also receiving extra money in the form of economic stimulus checks from the federal government.

“Furniture benefitted from people not going out to eat, not going to sporting events—people were staying in their homes, and they spent money where they spend their time,” Epperson said. “But as people began to go back to ball games and out to eat and travel, we lost some of that edge we had because things were going back to normal.”

And that has been reflected in the latest retail sales numbers from the U.S. Census Bureau, which found home and furniture sales decreased 5.5 percent month-over-month in November 2021. Inflation plays a role in that hit to sales, as do astronomical increases in shipping fees for merchandise arriving via ships from Asia.

“If you’re a retailer and you buy sofas from a factory in China, and you planned on paying $5,000 for that container, but now that container is $25,000, you can’t just add that to the price and expect the consumer to eat it,” Epperson said.

While some furniture retailers have been forced to raise prices—most recently, Ikea announced a 9 percent price increase globally due to supply chain issues—others have chosen to absorb those surcharges, cutting deeply into their margins.

Epperson said that with the production backlogs for furnishings and home goods, as well as continued inflation, material shortages, and logistical issues, the challenges furnishings businesses face likely won’t abate anytime soon. And that volatility will continue to impact risk assessments of the industry for the foreseeable future.

“It hasn’t been an easy,” Epperson said. “The demand for furniture is still pretty good, but our system is twisted out of shape, and nothing is flowing like it should. We’ve still got a lot of makeup to do.”