Further proof that Home Depot wants to be a major player in the direct-to-consumer home decor market: On April 25 the Atlanta-based retail giant announced a definitive agreement to buy St. Louis-based home furnishings cataloger/retailer Home Decorators Collection (HDC) from Knights Direct. Terms of the agreement have not been disclosed.
Home Decorators Collection has estimated catalog/Web sales of $192 million. It also operates six stores, in Missouri, Kansas, and Oklahoma, with a seventh scheduled to open shortly outside of Chicago.
According to Home Depot, the acquisition of HDC will double the size of its Home Depot Direct division. The division’s titles include upscale décor and lighting catalogs 10 Crescent Lane and Paces Trading Co., its recently launched Outdoor Living catalog, and the core Home Depot title, which focuses on decor rather than on the building and maintenance supplies that Home Depot’s stores are best known for.
Knights Direct’s other brand, bedding and spa products catalog Soft Surroundings, is not part of the deal. Grant Williams, chairman of Knights Direct, will remain in his role with Knights and provide advisory services to Home Depot Direct through 2006.
Home Depot spokesperson Jean Osta says the acquisition is part of the direct division’s long-term growth plan. “We are excited about the acquisition, and view it as part of our three-tiered approach; to enhance the core retail business, extend it into adjacent areas, and into new markets,” she says. “As significant as the acquisition is, it’s primarily an addition—a way to further expand our direct-to-consumer platform.”
Industry watchers were positive about the deal. “On the surface, although evaluations were not formally discussed in its release, I would guess that due to its size and economies of scale, Home Depot paid a multiple in the range of 9-10.5 times earnings before EBITDA for Home Decorators Collection,” says Larry West, principal of New York-based catalog investment bank West Cos. “This reflects the premium multiples being paid in our industry for large, profitable, well-run businesses.” Another factor that may have contributed to a premium valuation is what West calls “favorable seasonality.” According to the HDC package insert program data card, each quarter of the calendar year accounts for 25% of total revenue, making for a consistent flow of revenue.
“I would expect that HDC has higher gross margins and would help improve overall gross margins in the new combined business, as was the case when 1-800-Flowers acquired [home goods cataloger] Plow & Hearth,” West adds.
Lee Helman, managing director at New York-based investment bank Gruppo Levey & Co., believes that Home Depot envisions cross-selling opportunities with HDC customers who are not already Home Depot customers and vice versa. “If they can accomplish that, it’s the Holy Grail. This is a tremendous opportunity to accelerate the HDC catalog business as well as generating new customers for both entities.”
In fact, the HDC catalog will soon be available in Home Depot stores, although Osta offered no timetable as for when this will begin.
As for Soft Surroundings, its chairman/CEO, Tom Wilcher, says the seven-year-old brand will begin to expand. “Some time over the next 18 months, we will be getting our own distribution center in St. Louis,” he says. “Our current staff of about 130 will eventually grow, but for now we will be sharing services with HDC, helping us out with receiving merchandise and shipping products to our customers.” Soft Surroundings has offices and a contact center in St. Louis. It shares a distribution center in Mexico, MO, with HDC.