Daily News
From Home Furnishing Business
Sharing the Wealth
April 30,
2007 by in UnCategorized 
By Home Furnishings Business in on May 2007
Furniture has never been a particularly glamorous stock category on Wall Street, but its attracted big attention from private equity firms on both the vendor and retail sides of the industry.
Twenty years ago it seemed Heilig-Meyers was snapping up independents right and left, but in more recent years,
furniture has seen some major retail operations sell outright or majority shares to outside investors: Berkshire Hathaways thoroughbred stable of Jordans Furniture, Nebraska Furniture Mart, R.C. Willey and Star Furniture come to mind.
In 2005, Stamford, Conn.-based Saunders Karp & Megrue acquired 70 percent of Bobs Discount in Manchester, Conn. Sun Capital Partners has Wickes of Wheeling, Ill.; Norcross, Ga.-based Nationwide Furniture; and earlier this year acquired contemporary retail specialist Design Within Reach of San Francisco, as well as selling Mattress Firm of Houston to Boston-based private-equity firm J.W. Childs and a management team.
Also this year, the four-store Bensalem, Pa.-based Mealeys Furniture and Mattress was acquired by Parallel investment partners in Dallas.
Thats a partial list.
Selling a piece of, or all of their pie is not something a lot of retailers want to talk about, judging by the number of stores that declined comment for this article, but furniture stores that get bought fall into two general categories: those in trouble, and those who, despite a sluggish retail environment, have strong management and good market share.
Whats My Motivation?
Many of these investors are trying to pick up assets at very reasonable prices. For them its a value game, said Laura Champine, home furnishings analyst in the New York office of Morgan Keegan & Co., who noted a fire-sale mentality to some of the deals. Its not an acknowledgment that business is good (in furniture retail), theyre hopeful they can get a bargain and at some point turn it around. And its not as if everythings getting bought upStorehouse liquidated, after all.
For retailers in trouble, Champine said bringing in outside ownership is typically the last straw.
Lots of times its to pay down their own debt. Its to provide financial solvency and buy some time to turn it around, she said. Usually its something store owners will do when theyre getting to the end of their rope.
Jerry Epperson, managing director with the Richmond, Va.-based consulting and investment firm Mann, Armistead & Epperson, worked on the deal that recapitalized Lombard, Ill.-based Harlem Furniture through a deal among private equity firms Bear Growth Capital Partners, Pouschine Cook Capital Management, Mercantile Capital Partners and Harlem Chief Executive Officer Bruce Berman.
He believes that a lot of the outside investment in furniture retail has not involved fire sales.
A lot of the companies weve seen sell a stake in recent years have been successful, well-managed companiestake a Harlem or Bobs Discount, they want to grow the business, he said. Some of these retailers have managed very respectable returns. There are a lot of companies out there you dont read about every day that really arent interested in the whole world knowing what theyre doing.
Private equitys cash infusion offers even solid retailers a very valuable commodityliquidity.
Retail is under a lot of duress, and even at companies with consistent records, their earnings are down, Epperson said. We have some well-capitalized furniture retailers that dont have any cash. They have too much inventory, and theyre over-extended.
Their first reason is access to capital. Second, some retailers are interested in going public, but they arent really ready and they need a sophisticated investor who can lay the groundwork. Third, they have no next generation theyll pass the business to, so theres a real desire to build the next management team.
Epperson also noted that private equity firms interested in furniture have another reason for looking toward the retail side of the industry: With manufacturing, theres too much of a challenge, because they dont know where that production will end up.
Acquiring Good Management
While some retailers look to outside investors for help running the company, well-managed businesses that dont need a complete overhaul hold more attraction to private equity thats in search of more than a bargain. Berkshire Hathaway, for example, doesnt go for turnaround situations, and its furniture retail portfolio reflects that philosophy.
Those were obviously not fire sales, Champine said. Berkshire Hathaway doesnt buy companies to replace managementthey buy good management. Id say they would be very attractive to any retailer they approach.
R.C. Willey was doing fine on its own when it was acquired by Berkshire Hathaway, said Jeff Child, president, but had compelling reasons for the deal.
The main thing was considering the stability of the companythat no matter what happened with the family, the company would be stable, he said. There also were a lot more family members who were involved in the business at the time, some of who were not that interested in the furniture business. It was a win-win situation for giving those family members who didnt want to continue in the business a way out.
R.C. Willey benefited from its own strong business when it came to shopping for an ownership partner.
We were pretty particular because we werent in a position where we just had to do it, Child said. We wanted someone whod allow us to continue the model we had, that wed still be involved , and that as long as we were profitable there wouldnt be much outside interference in the way we like to do business. (Warren Buffett) basically said, You continue to run it the same way youre doing it now. If it hadnt been announced, a lot of our employees wouldnt have known about the transaction, it was that seamless. We could afford to be choosy and so could Berkshire Hathaway.
While Child noted that best practices input from Berkshire Hathaway was an added bonus, the real benefit of the partnership was for the retailers approximately 3,000 employees.
Theyre proud to work with a Berkshire Hathaway company, and they know that if something happens to the (Child) family, the company will still be here, he said. Theres a huge psychological and pride factor in our case.
While replacing management is sometimes unavoidable, Sun Capital Partners has a strong preference for working with existing owners, said Chris Metz, managing director for the Boca Raton, Fla., private equity firm. (In addition to Wickes, Nationwide and Design Within Reach, Sun Capital also has a 5 percent stake in Pier 1).
When considering a furniture retail acquisition, Metz said Sun Capital uses the same criteria it would for any investment.
We look for a company with a good brand and recognition in its marketplace, and a good market position, good market share; and a company that needs our in-house management expertise, on that may have been under-managed, he said. Our preference is to work with the existing management team, though in some cases you need to augment that. Sometimes, you just have to replace the management, but thats not our first choice.
The Right Fit
For retailers considering selling a controlling interest to an outside party, its important that both sides goals are compatible, and that retailers put the details of any agreement under a microscope, and understand the potential downside.
If their goal is to simply raise capital, there are a lot of optionsif they sell (ownership) its important that whoever they find as a partner brings some kind of value to the existing business, Metz said. They need to make sure theyre dealing with a reputable, experienced partner, particularly when it comes to their expertise in their industry. And they need to understand their role in the going concern. Will they be a silent partner, or take an active role managing the business?
Champine said its hard to make blanket recommendations, but that one thing is for certain for the sellersomeone else will have the last word.
They need to understand that they do give up control, she said. Private equity is notorious for bringing in someone they think is a better manager, and that can be difficult for (an owner) whos been an entrepreneur.
Childs at R.C. Willey said the relative advantages and disadvantages of selling a stake depend in large part on the retailers outside investor.
You are going to lose some of the economy to do for whatever you wantfor good or for worse, he said. Perform your due diligence, and know exactly what youre signing. I have a friend whose family ran a bottling company, and they were told theyd keep running it after they were acquired. Within minutes of signing the agreement, the family was fired. The whole process can be fraught with danger.
Champine predicted that more furniture retailers will examine agreements with private equity companies.
Theres more to come, she said. As much as it seems theres been a lot of moving of the chess pieces, weve just seen the beginning.