This is a container clue - one word or set of letters goes inside another word or set of letters that has been rearranged.
"Lousy" indicates an anagram of HENCE. "Bad" gives you ILL, which needs to go inside the anagrammed letters. The result is a type of fabric material.
Answer: CHENILLE | ILL (bad) goes inside an anagram of HENCE (indicated by "lousy"). HENCE rearranged gives CHENE, and ILL inserted gives CHENILLE - a soft fabric material used for upholstery.