Home Depot buys HDC

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 merchant Home Decorators Collection (HDC) from Knights Direct. Terms of the agreement have not been disclosed.

HDC 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. That division’s titles include upscale decor and lighting catalogs 10 Crescent Lane and Paces Trading Co., the recently launched Outdoor Living catalog, and the core Home Depot title, which focuses on decor rather than on the construction 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 with Knights and provide advisory services to Home Depot Direct through 2006.

Home Depot spokesperson Jean Osta says the acquisition is “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 think the deal is a wise one. “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,” he says.

“I would expect that HDC has higher gross margins and would help improve overall gross margins in the new combined business,” West continues, “as was the case when 1-800-Flowers acquired Plow & Hearth.”

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 to generate new customers for both entities.” In fact, the HDC catalog will soon be available in Home Depot stores.

The HDC customer, according to its data card, has an average household income of $75,000. That’s higher than the $65,000 average income of customers of the core Home Depot catalog, but lower than the six-figure incomes of the typical Crescent Lane and Paces Trading buyer.

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.” Soft Surroundings has offices and a contact center in St. Louis. It shares a distribution center in Mexico, MO, with HDC.