Acquiring furniture, décor businesses just got a lot trickier for investors

Magnified sales, selective store closures, fluctuating consumer preferences and an accelerated shift to online has collectively made evaluating home goods a lot harder.

Private equity firms eyeing home-goods and décor brands are waiting to see sustainable demand before jumping in, as shifting consumer preferences cause wide swings in sales, according to sources.

“Consumer has been very inconsistent and moving from one category to another,” said Lee Helman, managing director at Financo.

As the crisis has persisted, the industry has gone through a shift in consumer demand – from at-home office furniture to do-it-yourself projects to rugs and patio décor, explained Helman. “First, they [consumers] made sure they were adequately stocked, and second, that they were comfortable,” he said.

Many companies are getting a coronavirus sales boost, making the demand cycle both unpredictable and difficult to forecast. These dynamics and fluctuations will cause sponsors to sit on the sidelines until they see evidence that the trends will stick.

Those riding the current tailwinds include Sycamore Partners-owned Staples and public rivals Office Depot and Office Max, which all posted a jump in year-over-year sales growth as of mid-March, according to Facteus data service. Wayfair, also public, reported a 20 percent sales increase YOY during the first quarter as consumers adjusted to working from home.

In ordinary times, the upswing could spell progress but, in a pandemic, it points to demand that could disappear overnight. This is going to reinforce the need for good due diligence for PE firms hoping to buy the larger players in the space, said Bain & Co Partner Kurt Grichel.

Inflection will continue even post-covid

Virus-induced demand will persist even after stay-at-home orders are lifted.

“Even though consumers will look to spend more time out of the home,” said Helman, the refreshing and redecorating will continue as people tire of looking at the same stuff.

Another catalyst, according to Helman, would be the wear and tear of furniture and breakdown of essential appliances. Due to heavier pandemic usage, consumers will be forced to replace items sooner, he anticipated. “It’s more cost effective to replace than repair,” Helman said.

To add to that, big-ticket items that require installation or white glove delivery are on hold.

But as government-mandated closures and regulations ease, purchases that require at-home assembly will get fulfilled and possibly boost sales.

“There will probably be some businesses which will see rapid growth due to pent-up demand,” said Enoch Minn, partner at the consultancy firm, Parthenon EY. “Investors will wait to see if that demand will be sustainable.”

The current period of trial and adoption, virus-induced demand and the anticipated pent-up demand post-covid collectively make it difficult to predict the growth trajectory of acquisition targets.

The conversation with PE funds is centered around the elements that will be successful versus ones that will have a certain incidental success, Minn said.

Widened sales gap

Big-box discounters like Home Depot, Walmart, Lowe’s and Costco have been deemed essential while their competition – family-owned and mom-and-pop furniture stores – have largely stopped operating.

Benefits of these uninterrupted operations have been passed on to store suppliers, or in this case, portfolio companies of PE investors.

For example, Lincolnshire Management and American Capital-backed Nursery Supplies, Inc., which manufactures pots and trays, has products selling in all 50 states. “NSI’s products are critical and essential,” said Pieter Kodde, managing director at Lincolnshire.

“[They] are being sold in large stores like Walmart, Home Depot and Lowe’s,” he said, adding that the company is having more direct discussions with retailers as well.

At the end of April, when most home goods suppliers were forced to shutter stores, Nursery Supplies recorded 6 percent growth year-to-date.

The PE firm admitted that Nursery Supplies has sold more pots than trays in the past few months, which has allowed it to be more profitable on a unit basis. “It’s more to do with our product mix,” Kodde said, talking about the decorative pot additions to their patio line.

On the flip side, Grichel expects most mom-and-pop stores to close as coronavirus puts a dent on operations.

Online purchases

The accelerated shift to online shopping is also proving to have major implications for some companies. “Something that would have happened over years, happened in six weeks,” Grichel said.

“Those that have an online arm have done fantastic,” he added, emphasizing Wayfair’s growth. Shares of the Boston-based company have surged about 700 percent since covid-19 hit the markets.

Businesses serving Wayfair are riding the growth wave. Prospect Hill Growth Partners-owned Walker Edison, a furniture supplier to e-commerce businesses like Wayfair and traditional stores, is one of them.

The manufacturer has no offerings that require installation and the products are ready to assemble – top demands of consumers in the covid-19 environment.

Reliance on second- or third-order suppliers in low-cost markets like China is now another factor to evaluate closely before putting capital to work, according to sources.

Businesses, across sectors, are slashing their exposure to China – a trend that started during tariff discussions but has since escalated.

Prospect Hill Growth has considered potential acquisitions over time to grow Walker Edison, but always prioritized organic efforts. The playbook may be shifting, according to David Fiorentino, partner at the firm.

“Now, we are seeing more opportunities as companies have been stressed,” said Fiorentino.

The PE firm has no timeline in mind, but any acquisition will be made “either to broaden out the product line or to get into small niches,” Fiorentino said.

Wait and see

In general, it’s rare for a PE firm to be exclusively focused on home furnishings or décor. Most PE firms with investments in the sector have opportunistically invested. “Home is cyclical, so we haven’t worked with anyone who just focuses on this sector,” explained Minn.

As things stand today, there are plenty of headwinds and tailwinds to predict across the sector, according to Grichel.

The expectation is that “when brick-and-mortar stores open, they are going to take [some] share back.” However, “online players will continue to be in an advantageous position,” he said.

With PE investors, there’s a bit more of wait-and-see attitude, so conversations are slowed, said Minn.

Sponsors, according to Minn, are waiting to understand the magnitude of the next cycle on this sector – if any.

Action Item: Read more about Wayfair’s growth amid covid-19 here.