The clouds over the home furnishings sector don’t appear to be lifting anytime soon.
Z Gallerie has joined a rare, but ignominious group of retail banners. The upscale furniture and home decor retailer landed in bankruptcy proceedings for the third time on Oct. 16 in a bankruptcy court in Newark, N.J. The Chapter 11 filing was by DirectBuy Home Improvement Inc., which does business under the Z Gallerie banner. Z Gallerie was sold to DirectBuy, an affiliate of CSC Generation Holdings, during its second tour of bankruptcy proceedings in 2019. The retailer filed its first Chapter 11 petition in 2009. The business began in 1979 as a family-owned operation that grew to more than 75 stores. It was acquired by private equity firm Brentwood Associates in 2014.
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Z Gallerie’s chief financial officer Robert Fetterman said in a court document that the home chain has 21 retail doors across nine states, as well as an online presence. E-commerce sales in 2022 accounted for more than 50 percent of all sales, he said, adding that the online operation remained fairly consistent in its proportion of sales relative to physical stores since the 2019 acquisition. But he also said the stores have higher overhead, adding to liquidity constraints that were compounded by higher supply chain and import costs in late 2021 and into 2022.
He attributed the underperformance of the bankrupt retailer’s store network to rising interest and mortgage rates as consumers put off buying homes.
“Needless to say, macroeconomic trends have significantly impacted the Debtor’s business in the second half of 2023 and has had negative consequences for many in the Debtor’s line of business,” Fetterman said.
He added that the company plans to hire M&A advisory firm Stump & Co. as its investment banker to find a buyer. If Stump fails to find a buyer, Fetterman said Z Gallerie will be liquidated and its stores will be shuttered. For now, the company has secured a $1.1 million debtor-in-possession financing facility from ZG Lending SPV to keep the lights on.
The Chapter 11 petition listed assets and liabilities each at between $50 million to $100 million.
The home furnishings category has carried the highest default risk across retail since 2021, according to data from S&P Global Market Intelligence. Thus far this year, there’s been no shortage of bankruptcy participants in the hard-hit home sector.
January began with mattress maker Serta Simmons Bedding, owned by private equity firm Advent International, filing a Chapter 11 petition. One month later, Tuesday Morning found itself bankrupt for the second time in three years, and has since liquidated operations. April’s Bed Bath & Beyond bankruptcy also eventually ended in liquidation, with its intellectual property and related assets acquired by Overstock.com in June for $21.5 million. Overstock, best known for closeouts of home goods, in August rebranded itself with the Bed Bath & Beyond name to shed its liquidator image. On Tuesday, the company changed its corporate name to Beyond Inc.
The troubled home group saw the Chapter 7 filing of 81-year-old family-owned regional home chain Altmeyer Home Stores in July. August saw the closure of furniture firm Klaussner, also known as Klaussner Home Furnishings. And Solid Comfort, a Fargo, N.D.-based maker of casegoods for firms such as Marriott and Hilton in the hospitality industry, also shut down. Perhaps the biggest surprise was the abrupt shutdown of upscale home lifestyle retailer Mitchell Gold + Bob Williams. The company filed its Chapter 11 petition in September, and is now in liquidation mode after failing to find a buyer. Noble House Home Furnishings also filed a Chapter 11 petition last month, attributing inflation challenges and supply chain disruptions as reasons for its liquidity constraints. One bit of good news is that Noble House has GigaCloud Technology as its stalking horse bidder, likely ensuring that the brand gets another chance at life in retail land.
In some ways, it shouldn’t be a surprise that home has been so hard hit. The sector did better than expected during the pandemic when people were sheltering in place and needed to upgrade home offices. That began shifting when people started heading back to work. And even for those continuing to work from or working a hybrid home-office schedule, it should have been obvious that home improvement projects undertaken weren’t about to be repeated any time soon.
Some retailers appear to have been caught unawares thinking the boom was without end. That thinking contributed to even the better-operated stalwarts like Walmart and Target getting caught flat-footed with too many goods on hand at a time when consumers had already shifted their shopping patterns. That mistake led to both retailers missing first-quarter earnings expectations last year. And even Amazon had a misstep by expanding heavily to fulfill an influx of orders only to find itself with a $3.8 billion first-quarter loss last year and excess available capacity as consumers pulled back or went back to shopping in physical stores.
All retailers have been hit hard by rising supply chain costs post-COVID. But the home sector has been hit particularly hard due to higher costs for moving big pieces of furniture, both in imports and in shipments to customers. Those costs, along with lackluster online sales, likely pushed TJX Cos. banner HomeGoods to end its e-commerce platform. TJX noted in a regulatory filing that HomeGoods’ net sales for the year ended Jan. 28, 2023 totaled $8.26 billion, with the dot-com business representing “less than 1 percent” of total net sales for fiscal 2023 and fiscal 2022.