The road to ruin: A deep dive into the Conn’s, Badcock bankruptcy

THE WOODLANDS, Texas – You wouldn’t blame the good people in Arcadia, Wisconsin, for popping open some bubbly and celebrating like navy sailors in Manhattan on V-Day. 

Two of Ashley’s most direct competitors, Conn’s Home Plus and Badcock Home Furniture, fulfilled Wall Street expectations this week when Conn’s filed for Chapter 11 bankruptcy protection on Tuesday in order to “wind down” the entire 550-store combined business. The filing coincides with speculation that Big Lots, too, will soon seek protection from creditors in bankruptcy court, already closing locations, as well. 

But, the Waneks aren’t the sort to revel in the woes of others, and in this instance there are plenty of woes and plenty of others.

Citing “drastic shifts” in consumer behavior caused by the end of pandemic stimulus payments, as well as interest rate pressure, inflation and the costs of integrating its W.S. Badcock acquisition, all eminently predictable phenomena, Conn’s said in its 248-page filing that, with the bankruptcy court’s approval, it plans to sell all of its assets and run closing sales for all Conn’s and Badcock locations. 

At the emergency hearing on Wednesday, Judge Alfredo R. Pérez authorized Conn’s on an interim basis to “continue to operate their cash management system and maintain existing bank accounts” and to “continue to perform intercompany transactions,” according to court documents. In short, Conn’s has been authorized to implement its plan to shut down basically as the submitted plan proposes.

A final hearing on the Conn’s motion is scheduled for Aug. 20, with objections due Aug. 14.

The emergency petition comes after decreases in net revenue for Conn’s in every quarter since January 2022 except one, and that one was the first with Badcock in the mix. For the fiscal year ended this past January, total revenues were down 7.8% year over year to end at $1.2 billion, producing a net loss of $77 million. 

‘Dire and immediate need’

Norman L. Miller, president and CEO of Conn’s, stated in his supporting declaration that “extensive” attempts to secure necessary financing were ultimately unsuccessful, that as a result Conn’s could not create or access “additional liquidity,” and that it could not materially renegotiate its debt with its primary lenders. Those lenders include J.P. Morgan and Stephens Investments out of Little Rock, Arkansas, which was also an investor in Mitchell Gold + Bob Williams.

Miller said the failed attempts at increasing liquidity require the company to “wind down” the business and, in order to do so, secure an additional $25 million in credit.

The 10 Conn’s subsidiaries listed as the debtors claim “an immediate and critical need” to get financing to liquidate, according to page 31 of the filing. The debtors’ businesses are “cash intensive, with significant daily costs required to satisfy obligations to vendors, landlords and employees, and to have cash available for extensions of credit to the debtors’ customer base,” they claim. “The debtors need additional liquidity to cover the expenses of these Chapter 11 cases in order to effectuate the orderly wind-down of the debtors’ business.”

This is interesting logic, which, to paraphrase, states that because the company failed to secure more loaned cash, or liquidity, needed to continue, it now needs to get more loaned cash to shut down. Regardless, Judge Pérez authorized this part of the bankruptcy plan, as well, in Document 86.

Conn’s is pursuing Chapter 11 bankruptcy protection “to obtain the time and breathing room necessary to continue store-closing sales at their retail locations, as well as to pursue a court-supervised marketing and sale process for the company’s assets for the benefit of stakeholders,” Miller’s declaration states. Supervising will be J.P. Morgan, a primary lien lender, and the court.

Total liquidation

In a 248-page filing that reads a lot like a Chapter 7 petition, the publicly traded Conn’s group listed both assets and liabilities of between $1 billion and $10 billion and its number of creditors as between 25,000 and 50,000. However, the Wall Street Journal is reporting Conn’s assets at the time of the filing at $2.4 billion and liabilities at $1.9 billion. (A pay wall prevents hyperlinking.)

As of the petition date, the debtors had approximately $530 million in total funded debt obligations, detailed in the chart below from the filing. Total general unsecured debt and obligations to vendors total approximately $200 million.

Prior to the widely anticipated filing, Conn’s said it would close 71 Conn’s stores in 13 states and 35 Badcock Home locations throughout the Southeast. Many of those closings have already begun, signaled by their going-out-of-business sales and reported by local media from Texas to Florida.

While the filing was not a surprise, some of the reasons the Conn’s debtors provide for the fiscal “emergency” are. More accurately, it is surprising that the Conn’s c-suite failed to adequately anticipate the so-called “rough headwinds” economically and the difficulties integrating an erstwhile competitor in W.S. Badcock. 

The headwinds have been blowing for some time. Since fiscal 2022’s net sales of $1.3 billion, it’s been a slippery slope. For fiscal 2023, the quarterly drops in net sales reported by Conn’s were, respectively, 7%, 19%, 24% and another 19%, adding up to an 18% year-over-year sales decline and a $59 million net loss, according to the company’s quarterly filings. 

Fiscal 2024 bled red, as well, with quarterly losses in net sales of, respectively, 18%, 13% and 14%. Same-store sales for those quarters declined between 15% and 20% per quarter. Then, just as the third quarter ended, Conn’s acquired Badcock, which pushed net sales up 9% for the fourth quarter ended March 31 this year. Same-store sales dropped, however, 14%.

On top of a sluggish retail, particularly at popular price points, Conn’s had to contend with the higher price of money. Interest rate expenses increased to $82 million in 2023 from $26 million in 2020, according to the filing.

A quick end

The now authorized proposal allows Conn’s to continue to own and operate its subsidiaries, saying that no party has asked a court-appointed trustee to take over. The filing lays out a liquidation plan that includes closing sales and the sales of receivables, loan portfolio, lease rights and “all other assets.”

A self-imposed deadline for wrapping up the GOB sales is stipulated as Oct. 31. Fast action is needed, and fast action is already under way. Less than 24 hours after being authorized, B. Riley released on PR Newswire the “up to 50% off” sales both in-store and online at Conn’s and Badcock. “Store furnishings, fixtures and equipment are also available for sale. . . . Everything must go,” according to the release.

B. Riley also has a sizable minority stake in Franchise Group, which sold Badcock to Conn’s for all of Conn’s non-voting preferred stock, or 1 million shares. FRG acquired Badcock in November 2021 for $580 million.

As for creditors, in addition to J.P. Morgan and the Stephens Group, the investment arm of B. Riley holds $93 million of Conn’s debt, according to the Wall Street Journal’s reporting. This figure isn’t mentioned in the filings, at least that this reporter could find.

Creditors also include Samsung, which is owed about $21 million; LG Electronics ($14 million); and General Electric ($13.3 million). Companies in home furnishings mentioned in a separate filing listing B. Riley relationships, which might indicate that they also are creditors, include Standard Furniture, Serta Simmons, Purple and Elements International. For the full listing of top 30 unsecured creditors, click here.

Coincident with the bankruptcy plea, Standard & Poor Global Ratings downgraded FRG to CCC+ from B-, citing a “thin covenant cushion” and the Conn’s bankruptcy. FRG added contributions from the EBITDA for Conn’s to its own EBITDA. The bankruptcy likely means FRG won’t get the contributions and, therefore, could default on its loans, according to the S&P Global Ratings notice of its rating change.

A day prior, Moody’s Investors Service downgraded FRG to CAA1 from B3. 

Trial by fire

The Conn’s filing is the first “complex” bankruptcy case for newly appointed Judge Pérez, according to a report at Reorg.com. Pérez began his 14-year term on the Southern District of Texas bankruptcy court, one of the country’s busiest for corporate bankruptcies, in April this year.

Conn’s shares fell more than a third Wednesday to 34 cents. The 52-week high was $5.26.

Conn’s began as a home appliance retailer operating out of a single storefront in Beaumont, Texas, in 1937, with roots that go even 50 years before that to a plumbing business. At the time of the filing, Conn’s and Badcock had a combined 553 locations in 15 states, 244 of which are company-owned, as well as 22 distribution centers. The company and its subsidiaries employ 3,800 people.

W.S. Badcock was founded in 1904 in Mulberry, Florida, by Henry S. Badcock. His son, Wogan S. Badcock Sr., bought the store in 1920 and had opened 46 stores by 1960. Wogan S. Badcock Jr., an inductee in the American Furniture Hall of Fame, built the chain into the largest in furniture in the Southeast. When it merged with Conn’s, Badcock had 374 stores in the Southeast, 64 corporate locations and 310 independent dealer-owned stores.

If you are a Conn’s creditor, you can find information about how to file a claim here: https://dm.epiq11.com/case/conns/info.