• Joe Cahill On Business
  • Joe Cahill On Business

    What went wrong at Art Van Furniture

    Would the retailer have survived the forces roiling retail if Thomas H. Lee hadn’t come along? Maybe, maybe not. But it's clear private equity couldn’t solve its problems.

    Nicholas Eckhart/Flickr

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    Private-equity firms prefer to portray themselves not as ruthless corporate raiders, but as enlightened owners who bring modern management techniques and keen strategic vision to the companies they buy.

    "Private-equity-backed companies don’t just benefit from the capital injection provided by private equity, but also gain from the management and operational expertise that PE firms bring to a partnership," reads the website of the American Investment Council, a private-equity trade group.

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    79彩票注册网址Debatable at best, that proposition clearly doesn't apply to retailing.

    The latest case in point is Art Van, a Michigan-based furniture chain with big presence in the Chicago market. 61-year-old Art Van announced late last week 79彩票注册网址that it’s closing 125 of its 169 stores and selling off 44 others that operate under the Levin Furniture and Wolf Furniture banners.

    The shutdown comes barely three years after private-equity firm Thomas H. Lee Partners of Boston acquired Art Van in a $612.5 million buyout financed by the company itself.

    See, that's how private-equity deals work. Private-equity firms typically shell out relatively little of their own money when they buy companies. Instead, they engineer a clever switcheroo in which the acquired company borrows the funds that the buyout firm uses to pay the sellers.

    The company gets debt, but no cash to invest in its business. It has to pay interest on the loan, siphoning off cash flow that could have been used for other purposes. That's not a "capital injection." It's the financial equivalent of empty calories, weighing down a company with burdensome debt.

    79彩票注册网址In a fairly common variation on the theme, Thomas H. Lee raised the money to buy out Art Van’s founding family by having the company sell and lease back its real estate, according to bankruptcy papers the company filed Monday. Rather than paying interest on a loan secured by its assets, Art Van had to pay rent on stores it used to own. The effect is the same: a new financial obligation with no benefit to the company.

    79彩票注册网址That obligation came at a bad time for Art Van, which was facing new challenges in the intensely competitive, marginally profitable, slow-growing retail furniture business. Online merchants were gaining ground in furniture, as they have in other retail sectors. Furniture sales at Amazon and Wayfair surged 35.8 percent in 2018, compared with 3.3 percent growth for the Top 100 furniture retailers, according to . A wave of discounters were crowding into the market, too. And an aggressive expansion strategy that included 24 Chicago-area stores wasn't panning out as hoped.

    Thomas H. Lee seems to have had no answers for these challenges. In fact, executives installed or retained under the new owner—including some Sears expats—worsened Art Van’s woes with some ill-advised strategies. They ramped up investment in brick-and-mortar, despite clear signs that furniture shoppers were migrating online. New store openings continued in 2017 and 2018, and Art Van acquired Pennsylvania-based chains Levin and Wolf.

    According to the bankruptcy filing, the Chicago expansion caused “market oversaturation as new stores cannibalized revenues from preexisting locations,” and “the company was not able to achieve sustained profitability in Chicago.” The filing also outlines management’s difficulty integrating the Wolf acquisition, leading to “same-store sales declines of approximately 22 percent in Wolf in the second half of fiscal year 2019, as well as meaningful turnover of tenured sales staff.”

    Thomas H. Lee’s team was no more adept at merchandising. Inventory changes and new store layouts in 2019 “negatively impacted sales and led to increased markdowns from product that was not easily saleable,” the filing reveals.

    Executive turnover added to the sense of instability. The filing indicates “the company lost eight of its top nine executive leaders in fiscal years 2017 and 2018 through unplanned and, in many cases, voluntary departures.”

    79彩票注册网址The combination of management missteps and broader industry pressures sent Art Van into a financial tailspin. Same-store revenues fell 27 percent between 2016 and January 2020, while expenses “increased significantly," the filing reports. Profitability shrank steadily on an “adjusted EBITDA” basis, and Art Van sank into the red in fiscal 2019.

    Unable to negotiate a bailout, the company joined a long line of retailers that have ended up in bankruptcy after a private-equity takeover. A study by industry publication found that nearly 21 percent of 125 retailers acquired by private-equity firms since 2002 wound up in bankruptcy. Hundreds of thousands of jobs vanished as stalwarts such as Toys R Us, Sports Authority, Linens 'n Things, RadioShack and Payless Shoe Source succumbed.

    79彩票注册网址Risky in any industry, private equity’s M.O. is especially perilous for retailers. Traditional stores operate on thin profit margins and require continual investment to keep their layouts and fixtures fresh. With online rivals devouring market share, brick-and-mortar chains need capital to expand their digital offerings and invest in new store formats. Buyout debt exacerbates these challenges, putting more pressure on margins without providing any capital for such investments.

    79彩票注册网址Thomas H. Lee pointed out that it  in Art Van, without quantifying the loss. Save your sympathy for the 3,100 Art Van employees who will almost certainly lose their jobs, or the municipalities around Chicago and elsewhere that will lose tax revenues and get a big empty store in their struggling retail corridors.

    79彩票注册网址Would Art Van have survived the forces roiling retail if Thomas H. Lee hadn’t come along? Maybe, maybe not. But it's clear private equity couldn’t solve its problems.

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