A brighter outlook for mom and pops
In a slight reversal from the dominant narrative concerning big-box stores and their smaller competitors, independent hardware stores are seeing a bit of a revival across the United States as the economic outlook begins to brighten for the industry.
According to an IBISWorld report released in February, industry revenue has declined at an annualized rate of -0.4% over the last five years. However, IBISWorld estimates that revenue will finally trend toward the positive in 2013 at a growth rate of 2.0%, in addition to a 16.5% jump in consumer sentiment.
The report tempered the optimism a little by cautioning that though revenues were expected to grow and lift the tides of all boats, the overall number of firms operating in the industry is still expected to fall due to competition from big-box stores.
"The recovering housing market and increased spending on home improvement projects will help boost industry demand," said IBISWorld analyst Sean Windle. "Revenue growth and profit will remain low, however, because of continuing competition from home improvement stores and online retailers."
Despite the enduring problems this level of competition creates for smaller shops, Windle said that many independent stores have weathered the changes successfully by diversifying product lines and changing floor plans.
Small business owners interviewed by Philly.com maintained that their service and deep knowledge of the industry separated them from their corporate cousins. According to the source, small businesses that do not have the wherewithall to expand physically are offering services that respond to the needs of their local market.
Nick Sprowls, former owner of Sprowls Country Hardware in Claysville, Pa., was not one of the luckier mom-and-pop owners, but his experience is a testament to the gap in satisfactory service from big-box competitors, according to Observer-Reporter.com. The 122-year-old store officially shut down this year on April 30, but Sprowls had built a loyal following despite his inability to compete with stores like Home Depot and Lowe’s.
"They nickel-and-dime you to death," Sprowls told the news source. "They go to Lowe’s and spend 400 bucks on a project, and then they come here to buy a three-dollar fitting off of you, and you have to spend a half-hour explaining to them how to hook it up because nobody at Lowe’s could."
Orchard Supply moves forward with liquidation process
Following its asset acquisition deal with Lowe’s, Orchard Supply Hardware is moving forward with its effort to close underperforming stores and has won approval to seek bids from liquidators to hold going-out-of-business sales.
Bloomberg reported that U.S. Bankruptcy Judge Christopher Sontchi granted approval for a June 27 liquidator auction at a hearing Tuesday in Wilmington, Del. Orchard plans to close at least eight of its stores that are not due to return to profitability. The company also has the option to hold going-out-of-business sales at another of its 22 stores until July 31.
Liquidators Hilco Merchant Resources and Gordon Brothers Retail Partners have already jointly offered a 74% recovery on assets sold. Other liquidators will need to submit their bids by June 25, with the winner to be announced June 28.
Orchard would need to provide the joint venture with a $300,000 breakup fee in the event that it chooses a different liquidator, according to The Deal.
According to Bloomberg, Orchard Supply listed $441 million in assets and $480.1 million in debt in Chapter 11 papers filed Monday.
Lowe’s to buy assets of Orchard Supply
As part of Orchard Supply Hardware’s filing for Chapter 11 bankruptcy, the company has reached an agreement for Lowe’s to purchase the majority of its assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard’s supplier partners. Under the terms of the agreement, Lowe’s, serving as “stalking horse bidder,” would acquire no less than 60 of Orchard’s stores, based on further due diligence on the store locations.
Orchard expects to operate its overall business and the majority of its stores as usual during its financial restructuring and has secured $177 million in debtor-in-possession financing from Wells Fargo Bank.
The retailer expects to pay suppliers in the normal course for all goods and services delivered on or after June 17, 2013, with payment for goods and services delivered prior to the filing addressed through the Chapter 11 process. Orchard Supply anticipates Lowe’s will assume responsibility for most of those payments.
Orchard says it will operate as a separate, standalone business at the completion of the sale process, retaining its brand, management team and associates. The chain was spun off a standalone business from Sears in 2011.
“The steps we are taking today allow us to definitively address our balance sheet issues in order to fully execute on our brand transformation and growth strategies,” said Mark Baker, Orchard president and CEO. “We believe that Lowe’s offer is a validation of Orchard’s unique market opportunity and of our strategy to capture it. We are confident the steps we are taking today will allow us to achieve our financial and operational goals.”
Robert A. Niblock, chairman, president and CEO of Lowe’s, said Orchard has a good business model but has been saddled with debt, and the retailer’s neighborhood stores complement Lowe’s big-box stores and will also boost Lowe’s presence in California.
“Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s is currently underpenetrated, and will enable us to participate more fully in California’s economic recovery,” said Niblock.
The transaction is expected to be consummated through a court-supervised process under Section 363 of the U.S. Bankruptcy Code and is subject to an auction and bankruptcy court approval.