April 2020 Update
COVID-19 has put a pause on much of the global economy. The furniture industry is no different – domestic factories are mostly shut down, many workers have been furloughed or laid off, brick & mortar retailers are by and large closed, and the Spring High Point Market has been canceled. Companies are conserving cash by cutting costs, drawing down unused lines of credit and extending payables wherever possible. Public stocks have taken a beating, and the market capitalization of our industry’s leading public firms is now stunningly low.
The federal government’s multi-faceted bailout programs, most notably the Paycheck Protection Program (PPP), should provide a band-aid to firms over the next 8 weeks. Hopefully, the crisis will have largely abated by then, and the process of rebuilding can begin. However, there is growing consternation that this pandemic may last well past May, further delaying economic recovery.
“We don’t know the course of this virus induced economic recession; what shape will it take? A double dip W? a U? a V? or most pessimistically an L?” queried one industry titan.
“Will these retail sales be lost or postponed? Memorial Day may well be an early test of pent up demand if we can get on the other side of virus shutdowns,” shared one southern retailer.
Our E-Commerce clients and friends seem to be faring well, even thriving, through this time (some have reported as much as 25%+ growth over Q1 2019). This period of forced retail closures and increased time at home is pushing consumers online. We believe this period of change will accelerate the growth of furniture e-commerce. We are also observing that those who have invested in the infrastructure and systems to enable remote work and digital management are much more efficient during these trying days. These are trends we are watching closely.
Our hope is that the virus and quarantine passes, effective testing and re-opening measures are put into place, and that we can all mostly get back to business by mid-May or early June.
Once that happens, we anticipate rapid developments in M&A:
- Current deals that have hit the pause button should kick back into gear with face to face meetings, on premise due diligence & factory inspections, and a return to the negotiation table to discuss valuation, structure and timeline to close.
- We have several transactions where a CIM is written and are merely waiting to launch the project, based on the “new normal” of this economy.
- Banks and other creditors will begin to squeeze struggling companies and force asset sales and divestitures, while simultaneously unleashing credit to stronger players to fund capital projects.
Though difficult now, we believe on the other side of this mess there will be rare and significant opportunities for internal growth, strategic pivots, and M&A. Those with strong balance sheets and business plans that thrive in these perilous times will emerge strong and acquisition hungry, having used this volatile time to reassess priorities and forward-looking plans. Those companies with anemic profitability and debt heavy balance sheets will be in peril and likely seeking an exit (or perhaps even be forced to close).
We encourage our clients and industry friends to take this time to plan out their approach for the rest of 2020, and to decide the optimal path forward. If a turnaround of the business is unlikely, then cut bait quickly and get out. Downward spirals are always difficult to reverse, particularly in the furniture business. If you are a survivor, then review your strategic priorities and think carefully about allocation of resources: financial, human capital, and time.
In the meantime, we would love to hear from you and learn about your plans for navigating through this unprecedented time. We remain busy with several deals still in Due Diligence or the closing phase, with several others just behind (albeit temporarily paused).
We are also enjoying our new Charlotte HQ office, with new BDI furniture, a custom Bernhardt conference table, OFS/Highmark seating, HAT sit/stand desks, IOP monitor arms, and Ralph’s wonderful 1980s Hancock & Moore leather sofa. We are humbled, and thankful, for all our long-time clients and friends. When the dust settles, we look forward to having you visit.
Stay safe and wash your hands. Call us, we are here to help.