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DELAWARE, Ohio — While many retailers are overstocked with product they bought when the pickings were slim, Top 100 retailer American Freight may be feeling it more acutely.
In a Nov. 3 call with investors, Franchise Group President and CEO Brian Kahn noted that the retailer — one of Franchise Group’s subsidiaries — “paid too much for the wrong inventory” and is now feeling the pinch as it works to correct its merchandise mix.
Kahn said all three of Franchise Group’s home furnishings properties — American Freight, Buddy’s Home Furnishings and W.S. Badcock — have seen product costs escalate. However, American Freight’s inventory situation presents a different set of issues, stemming from buys made when the supply chain was at its most stretched.
“For American Freight, the main difference was when supply was tight, and there was a time we couldn’t get inventory — the supply chain contracted and the wait times were long, and orders were canceled anyway — we bought what we could instead of what we should, and we bought at higher prices as well,” Kahn said during the call.
“It’s one thing if you buy what your customers are used to seeing and you get the margins. It’s another thing when you buy anything. We’re essentially unwinding that,” he continued. “We can either dribble it out over time and try to maintain normal margins — and that is what a lot of people are doing — or we can rip the band aid off, move the inventory off and reset the deck.
“Everything on the floor that shouldn’t be there and doesn’t run takes up space from the right (piece) that will move three to four times. It’s just sitting there waiting to be written off. It’s a sunk cost. We need to move on, and that’s what we’re doing as aggressively as we’re doing. The right inventory at right price points will allow our salespeople to service our customers.”
Kahn said as the merchandise pipeline slowed to a trickle, the retailer could have run skinny and waited, but officials felt it was best to get merchandise on the floor.
“The merchants’ job was to get the best deal they could; there were no best deals. Their job was to buy inventory and move it. This was not a 99% conviction bet, but we made it anyway,” he said. “We’ve had a lot of good fortune as well. It’s disappointing, but it doesn’t have any impact in how I view the future of American Freight whatsoever.”
As the holiday season approaches, Kahn said FRG officials see it as the perfect time to continue discounting merchandise to properly rebalance the assortment.
“We’re going to race to get through this. We happen to be approaching the holiday season, and we typically wouldn’t have large promotions going into the holiday season in home furnishings, but we will,” Kahn said. “We’re going to discount and we’re going to incentivize our salespeople to move the merchandise we have now. Everything we sell now we can replace with lower cost items.”
Kahn said he sees good things ahead for American Freight with a refreshed, right-sized assortment under the leadership of new Home Furnishings Division CEO Peter Corsa. “I continue to believe American Freight will be the most valuable business among the six brands we own today in terms of annual free cash flow and terminal value to Franchise Group,” he said.
