Parent company's economic distress doomed 120-year Badcock furniture

In mid-December of last year, a week before Christmas, Texas retailer Conn’s Inc. sent out a press release ahead of its quarterly earnings report.

The suburban Houston furniture and appliance merchant announced it had bought the more than century old Polk County-based W.S. Badcock LLC.

The deal, an all-stock transaction, would boost Conn’s store count to more than 550 in 15 states.

In the release, an executive for Conn’s called the purchase of Badcock “one of the most significant events in (Conn’s) 120-year history.”

Later that day, the combined company’s newly installed president and CEO, Norman Miller, said in the earnings statement that adding Badcock with its comparable products, credit offerings and customer bases would create “a leading home goods retailer with approximately $1.85 billion in retail sales across strong urban and rural markets in the southern U.S.”

 “The Badcock transaction,” Miller told investors, “represents one of the most significant events in Conn’s history, which we believe creates a clear path for Conn’s to deliver strong financial returns over the coming years.”

But 218 days later, on July 23, Conn’s filed for Chapter 11 bankruptcy in the Southern District of Texas in Houston. The company, according to court records, did not have enough cash to service its debt and efforts to fix the problem hadn’t panned out.

Image via Conns.com/ Facebook

It would close all of its stores and sell off its assets. The bankruptcy process, Miller writes in a declaration of facts submitted under oath that was included with the initial filing, was just a way to get the “time and breathing room” needed to liquidate what it could for the benefit of shareholders.

Badcock, the once family-owned business that started in Mulberry, would vanish along with its corporate parent and with it would go more than 100 jobs at the company’s corporate office locally. Hundreds more jobs will be lost when the stores shut down later this year after liquidation sales.

So, what happened? What led Conn’s, a company with a history as long and storied as Badcock’s, to fail? And, what, if any, was Badcock’s role in the collapse just seven months and five days after the sale was announced?

Company representatives did not respond to a request for comments. This story is based on court records, earnings statements and press releases. The most telling document is Miller’s declaration — it runs 29 pages and goes into details of each step the company took.

Failed turnaround

That last question, about Badcock’s role, is difficult to answer because Miller, in his declaration, only cites “integration delays and increased costs associated” when discussing the Badcock purchase in terms of the eventual bankruptcy.

Beyond that, what he details is a slow unraveling of a once proud retailer whose ambitions were met with the reality of a post-COVID economy, problems that began long before Badcock was brought into the fold.

Miller writes that “a convergence of factors” led to the eventual bankruptcy filing. Among those were “significant macroeconomic” forces that have upset the retail industry as whole, including shifts in consumer spending; inflation driving costs and wages up; and higher interest rates increasing the cost of capital.

The trouble for Conn’s started during the pandemic, when, ironically, sales “skyrocketed.”

Miller writes that once the initial shock of the lockdown wore off and stimulus money began pouring in, consumer spending on durable goods like the ones Conn’s sold jumped.

With millions stuck at home, the demand for discretionary goods increased “to unprecedented levels as people sought to make purchases to improve their homes where they were now spending a significant portion of their time.”

While this was a positive development at the time, it created an unanticipated long-term problem.

That’s because the increased consumer spending “pulled-forward” demand, meaning purchases that would have been made over a long period of time were made in short order.

But it didn’t last long, Miller writes. “As stay at home orders began lifting across the country, followed by the waning of the federal stimulus measures, consumers began to refocus their time and money on services versus goods and discretionary spending has steadily decreased.”

That change in behavior was coupled with an uptick in inflation and interest rates and Conn’s, he writes, saw “a sharp decline in demand for the company’s products and, relatedly, its credit offerings.”

(Credit was a major part of both Conn’s and Badcock’s business model — both helping push sales and increasing cash flow. According to court records, 61.3% of purchases in fiscal year 2024 were financed through the company’s in-house credit program and about 23.1% percent through outside finance sources. Only 15.6% of sales were paid for in cash or on a credit card.)

Image via Badcock.com

Those macroeconomic issues weren’t just reserved for the retail sales side of the company. Rising interest rates also affected Conn’s in other ways.

While the company for years relied on its sales and the issuance of credit to fund its operations, the downturn meant it had to rely on debt more often. Which meant that its costs climbed as interest rates rose.

Miller writes that interest rate expenses rose from $25.7 million in the year that ended Jan. 31, 2021 to $81.7 million in the year that ended Jan. 31, 2024 — up 217.89%. “The steady increase in interest rates and costs of capital, with minimal to no relief in the near term, has detrimentally impacted the company’s ability to service its debt obligations.”

This all was happening as the company worked to rid itself of leases at underperforming stores and worked to secure, as late as December, additional financing to address the liquidity issue.

High costs

All of this leads to a simple question: What did Conn’s hope to accomplish by bringing in a new business while dealing with its own existential struggles?

Miller, in the declaration, calls the purchase “a strategic initiative” to grow the company’s footprint, customer base and product offerings and to “achieve over time material cost and operational” unity. He also cites Badcock’s credit program that could be blended with Conn’s to grow.

Miller admits, however, that for the costs and revenues to be fully realized it would take between a year and 18 months.

But a big clue as to the thinking behind the purchase is included near the top of the Dec. 18 announcement: Buying Badcock, the company writes, “enhances Conn’s balance sheet by bringing approximately $125 million of incremental liquidity with the addition of Badcock collateral and extends debt maturities by three years.”

Miller goes into further detail in the declaration.

He writes that on Dec. 18, the day the deal was announced, Badcock joined as a borrower in a new loan agreement, adding “a required minimum EBITDA financial covenant.”

According to a paper written by Scott Opincar, an attorney with the Cleveland law firm McDonald Hopkins, a minimum EBITDA covenant measures “a company’s (earnings before interest, taxes, depreciation and amortization) against certain minimum requirements set forth by the lender.”

In other words, by having Badcock's assets on the books, Conn’s was able to get the much-needed cash. It was, in a strange way, a co-signer.

But the lack of cash to service the debt was just a symptom of many larger problems — one the addition of Badcock could not fix.

And after working with stakeholders in an effort to restructure and stabilize the company, Conn’s determined that even in bankruptcy court there was no viable way to get the liquidity it needed to continue as a going concern, writes Miller.

“Accordingly, the debtors determined that an orderly wind down of the business would maximize the value of their assets.”