By Barbara Thau
NEW YORK–Market forces hobbled the specialty home sector in 2007 as the housing malaise and subprime mortgage crisis tempered home goods spending dramatically.
In 2007, 13 of the nation’s biggest home retailers faced sales declines or stagnant growth, HFN’s fourth annual Top 25 Total Home Store Report revealed.
The performance marks of a reversal of fortunes from just two years ago, when a hefty 40 percent of the home specialty stores on the list logged double-digit sales gains.
Of course, the macroeconomic picture could not shoulder all the blame. It merely made already weak retailers—such as Bombay, which is now liquidating, and Fortunoff, which filed for bankruptcy last month—weaker.
It also made life harder for merchants like Pier 1 Imports and Linens ’n Things, which were working to effect a turnaround, as well as those updating a concept that had lost its luster, such as Pottery Barn.
However, there were some bright spots.
Some chains gained market share via organic expansion and by growing spinoff concepts, such as Ikea, Williams-Sonoma Home and CB2.
“The environment went from bad to worse throughout the year,” said Chris Horvers, an analyst with Bear Stearns. “The housing story played out throughout the year and the consumer started trading down
Department stores’ focus on the home business was heightened in 2007 with bold, high-profile launches—Martha Stewart at Macy’s, Vera Wang at Kohl’s—stealing some of the home thunder from the total home stores, Horvers said.
Winners, Losers and Place Holders
Bed Bath & Beyond held on to its top spot as the nation’s largest total home retailer, but growth slowed last year as the business matured.
“They were not immune; their sales took a hit,” Horvers said.
In the first quarter of 2007, the teacher’s pet of retail posted a 1.6 percent comp-store sales gain.
“It was the first time they reported comparable-store sales below 3 percent since they went public in 1995,” said Joseph Feldman, managing director of Telsey Advisory Group.
While growth has slowed at its core stores, Bed Bath sees the buybuy Baby children’s chain it acquired last year and international expansion as a fresh opportunity. It recently opened a store in Canada.
And it continued to distance itself from rival Linens ’n Things, number two on the list.
Linens, grappling with bottom-line declines, is in the first three years of a nine-year turnaround plan spearheaded by Chief Executive Officer Bob DiNicola.
The CEO has made improvements to the soft side of the business, but hard home—from home decor to tabletop—“needs more work,” DiNicola told HFN in November.
And the highly promotional home goods environment only further challenged the company, Frank Rowan, chief financial officer, told HFN then.
Linens, which secured a $700 million loan in the fall to help fuel its turnaround, must show tangible financial improvements this year to remain in good standing with vendors, some suppliers said.
“It’s really hard to turn a business around when the secular environment is in your face,” Horvers said. “If you’re a good merchant, you’ll do better than average, [if you’re not], you’ll do worse than average.”
Merchants Bombay, Expo Design Centers, Pier 1 Imports, Fortunoff and Restoration Hardware all lost market share last year, but for different reasons and to varying degrees.
Bombay, like many furniture retailers, was underfinanced and saddled with debt.The retailer is liquidating but the brand will live on in some form as the Bombay name has been purchased by Hilco Consumer Capital Corp.
Meanwhile, Home Depot’s higher-end spinoff Expo Design Centers slipped in 2007 “as consumers traded down and the [drop-off in sales of] big-ticket goods got worse as the year went on,” Horvers said. Shoppers figured, “maybe I don’t need that Viking stove after all.”
Pier 1 posted a sales decline but stemmed market-share losses last year under the direction of new CEO Alex Smith, who made radical changes in 2007.
These included exiting a spate of businesses, such as e-commerce, the catalog arm and Pier Kids; closing about 100 stores; and de-emphasizing larger-ticket furniture items in favor of smaller-ticket impulse buys.
The retailer dramatically narrowed its net loss in the most recent quarter, “and they should be able to do positive low single-digit quarterly comps through 2008,” Joan Storms, retail analyst with Wedbush Morgan Securities, told HFN in January.
It was a mixed bag for Williams-Sonona, which has more spinoff chains than any other merchant on the list.
While the retailer’s emerging brands, West Elm and Williams-Sonoma Home, generated healthy gains via store openings, growth stagnated in 2007 for its mature brands, housewares merchant Williams-Sonoma and furniture chain Pottery Brand, its biggest brand and problem child.
Pottery Barn—known for its sea of neutral merchandise— has undergone a makeover, showcasing a mix of bold colors and patterns, and “the reintroduction and re-emphasis of opening price points in our assortment,” Pat Connolly, chief merchandising officer of Williams-Sonoma, said during a conference in January.
The retailer has now earmarked e-commerce—its fastest-growing channel—as a massive growth opportunity. But that will come at the expense of the catalog business, Connolly said.
West Elm, its modern, lower-priced furniture chain, has also been pegged for aggressive expansion.
CB2, West Elm’s symbolic twin, opened its third store in the fall with a store in Manhattan’s SoHo neighborhood, tacking on market share.
Look for the Crate & Barrel spinoff to move up the list as CB2 plans to operate 15 stores in the next few years.
In New Leadership, Ownership Hands
Crate & Barrel also gained market share in 2007, and 2008 should be a seminal year for the chain.
Gordon Segal will step down as CEO of the chain he founded in 1962. Barbara Turf, president and Segal’s longtime merchandising partner, will succeed him in May.
And this year, Crate & Barrel will make its international debut with a store in Toronto. It’s also eyeing Europe and Japan for growth.
Fortunoff and Restoration Hardware will each enter a new phase this year in the hands of new owners.
While Restoration Hardware’s CEO Gary Friedman, the former Williams-Sonoma president, “is a brilliant merchant, their operations have notoriously been poor and they’ve had a hard time making money on the business,” Feldman said.
But Catterton Partners is in the process of buying the chain.
A private-equity buyer’s deep pockets may be just what Restoration Hardware needs to fix its costly supply chain and ultimately position itself for profitability, analysts said.
“The company has shown growth in the top line. It’s not a merchandise problem; the problem is turning it [sales] into profits,” Laura Champine, retail analyst with Morgan Keegan & Co. told HFN when the Catterton deal was announced in the fall.
Fortunoff’s high expense structure and high debt combined to tax the chain, sending it into bankruptcy last month.
But NRDC, the parent of Lord & Taylor, who bought the chain this month, has come to the rescue. And so has retail veteran Charlie Chinni, who was named chairman and CEO this month. He succeeds Arnie Orlick, who was ousted.
NRDC plans to double Fortunoff’s store base and add Fortunoff-branded home departments in Lord & Taylor’s stores.
Can Chinni do for Fortunoff what he did for J.C. Penney as executive vice president of home and jewelry for the midmarket chain, where he led one of the biggest home furnishings turnarounds of the decade? Stay tuned.