Eighty-nine of the 91 Orchard Supply Hardware stores are in California.… (Paul Sakuma, Associated…)
Home improvement giant Lowe's Cos. aims to score a bigger piece of California's real estate recovery by agreeing to rescue Bay Area rival Orchard Supply Hardware Stores Corp.
Lowe's on Monday made a $205-million bid for the company, sometimes known as OSH, which filed for Chapter 11 bankruptcy protection, weighed down by years of declining sales, an overcrowded market and massive debt inherited during its time with former parent Sears Holdings Corp.
Although the Mooresville, N.C., chain outpaces OSH in size and sales, it is less established in the Golden State, where home sales last month hit a seven-year high. Eighty-nine of Orchard's 91 stores are in California.
Customers at many of those outlets were surprised by the bankruptcy and proposed acquisition and worried that the chain's intimate feel might not survive the transition.
"Orchard is smaller and easier to navigate," said Santa Monica administrative assistant Jessica Steinberg, 27, who patronizes the chain for "little things like tape and mason jars."
"I just hope it doesn't change," she said.
Lowe's is offering to pay $205 million for most of OSH's assets, including at least 60 of its stores, and to assume the payables owed to most of its suppliers. Under the agreement, OSH would keep its brand, continue operating its stores as a stand-alone business and retain its management team and employees.
OSH, which said it hopes to complete the bankruptcy process within 90 days, reported $657 million in revenue during its last fiscal year. Lowe's, the second-largest home improvement chain in the country after Home Depot Inc., pulled in $50.5 billion in sales.
For now, Lowe's is serving as a so-called stalking horse bidder, offering a bid for OSH that can be topped by other suitors at an auction this summer.
Interested buyers must exceed Lowe's price by $12 million, according to the acquisition agreement. If they do, Lowe's gets a 3% breakup fee.
Considering OSH's long-running struggles, analysts said they don't expect much interest.
The paint, garden and hardware-focused chain, which was launched in 1931, was spun off from Sears Holdings less than two years ago. OSH now blames its financial woes on the heavy debt it accrued during the retailer's ownership.
OSH also faced "terrible market conditions," such as high foreclosure rates and declining homeownership levels, said Lawrence Perkins, chief executive of bankruptcy and restructuring advisory firm SierraConstellation Partners. Consumers became more price-sensitive than service-oriented, favoring mega-chains with cheaper goods.
"They've had this confluence of circumstances chasing them for a while," he said. "It's been coming at them from every angle."
And the company is "in a weird place" competitively, squashed between financially sturdy giants such as Home Depot and Lowe's and local mom-and-pops with a loyal following, such as Anawalt Lumber, Perkins said.
"They're too big to be small and too small to be big — just somewhere in between," he said. "That's a very hard dynamic."
OSH's stock plunged nearly 90% in the last year. Its same-store sales at locations open at least a year have fallen each year since at least 2007. In its fourth quarter, which ended Feb. 2, its net loss widened to $33.6 million from a loss of $7.2 million a year earlier.
Lowe's has been stronger, though still pressured by Home Depot, its primary competitor. Lowe's stock price has jumped more than 50% since June 2012, but its profit and revenue have been shaky. Its same-store sales dipped 0.7% in the last quarter after rising 1.9% in the previous quarter, compared with the 4.3% and 7% boosts recorded by Home Depot.
As the housing market rebounds, home improvement companies are scrambling to ride the upswing. The $164.4-billion industry grew 0.5% a year from 2008 to 2013 but is expected to rise an average of 3.1% annually in the next five years, according to research firm IBISWorld.
Permits for future construction rose to a nearly five-year high in April, even as housing starts dropped, the Commerce Department said last month. Surging consumer confidence and swelling incomes have encouraged larger household purchases, according to the IBISWorld report.
And in California, where just 110 of Lowe's 1,750 North American stores are located, the effect is magnified by the enormous population. Home Depot has 233 stores in the state.
Nationwide, Lowe's had 215 stores within 25 miles of major urban centers compared with 470 for Home Depot, according to a fall report from Janney Capital Markets.
"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 under-penetrated, and will enable us to participate in a larger way in California's economic recovery," Lowe's Chief Executive Robert A. Niblock said in a statement.