SWEET HOMES INC.
The difference between a company with a concept and one without is the difference between a stock that sells for 20 times earnings and one that sells for 10 times earnings. Sweet Homes Inc. is definitely a concept stock and it has he multiple to prove it- 27 to 28 times likely earnings in the current fiscal year. On the face of it, Sweet Homes might
Seem like a tough one for concept managers to work with. It is a chain of hardware stores. These Hardware stores are huge warehouse outlets – 60,000 – 80,000 feet space. You can fit a awful lot of saws in these and still have plenty of room left over to knock together a very decent concept.
The truth is, the warehouse notion is the hottest thing in retail these days. Sweet homes buys in quantum quantities which mean its suppliers are eager to keep within its good graces and hence provide it with lot of extra service. The company , as it happens is a master in promotion and pricing. It has 22 stores, all of them located where the sun shines all the time.
Growth has been sizzling, Revenues are mere $22millon is fiscal ’80 shot past the quarter billion mark three years later. As to earnings, they have climbed from 2 cnts in fiscal ’80 to 60 cents in the fiscal year coming to an end [in Jan, 1985]
They’re confidently estimating 30% growth in the new fiscal year as well.
Sweet Homes Inc. was founded in 1978 by Diamond Inc. to bring the warehouse retailing concept to the home center industry. The company operated retail “do-it-yourself” (DIY) warehouse stores which sold a wide assortment of building material and home improvement products. Sales, which were on cash and carry basis, were concentrated in the home remodeling market. The company targeted as its customers individual come owners and small contractors.
Sweet home’s strategy has several important elements. The company offered low and competitive prices, a feature central to the warehouse retailing concept. Sweet home’s stores, usually in the suburbs, were also the warehouses, with the inventory stacked over merchandise displayed on industrial tracks. The warehouse format of the stores kept the overhead low and allowed the company to pass the saving to the customers. Costs were further reduced by emphasizing higher volumes and lower margins with a high inventory turnover. While offering low prices, Sweet Homes was careful not to sacrifice the depth of merchandise and the quality of products offered for sale.
To ensure that right products were stocked at all times, each Sweet Homes store carried approximately $4,500,000 of inventory, at retail, consisting of approximately 25,000 separate stock-keeping units. All these items were kept on the sales floor of the store. Thus increasing convenience to the customers and minimizing out-of-stock occurrences. The company also assured its customers that the products sold by it were of the best quality. They offered nationally advertised brands as well as the lesser known brands carefully chosen by the company’s merchandise managers. Every product sold by them was guaranteed either by the manufacturer of the company by itself.
Sweet Homes complimented the above merchandising strategies with excellent sales assistance. Since a great majority of the company’s customers were individual home owners, with no prior experience, in their home improvement projects, Sweet Homes considers its employees’ technical knowledge and service orientation to be very important to its marketing success. The company pursued a number of policies to address this need. Approximated 90% of the company’s employees were on a full-time basis. To attract and retain a strong sales force, the company maintained salary and wage levels above those of its competitors. All the sales personnel attended special training sessions to gain through knowledge of the company’s home improvement products and their basic applications. This training enabled hem to answer shoppers’ questions and help customers in choosing equipments and materials appropriate for their projects. Often the expert advice the sales personnel provided created a bond that resulted in continuous contact with the customer throughout duration of the customer’s project.
Finally, to attract customers Sweet Homes Inc. pursued an aggressive advertising program utilizing newspapers, television, radio and direct mail catalogues. The company’s advertising stressed promotional pricing, the broad assortment and depth of its merchandise and he assistance provided by its sales personnel. The company also sponsored in-store demonstrations of do-it-yourself techniques and product uses. To increase customer’s shopping convenience the stores were open seven days a week, including weekday evenings.
Fortune Magazine commented on Sweet Home Inc’s strategies as follows –
“Warehouse stores typically offer shoppers deep discounts with minimal service back-to-basics ambience. Sweet Home Inc had all the charm of a freight yard and predictably low prices. But they also offer unusually helpful customer service. Sweet Homes is the only company that has successfully brought off the union of low prices and high service.”
The strategies were successful in fueling and impressive growth in the company’s operations. From their modest beginning in 1979, the company grew rapidly and went public in 1981. The company’s stock initially traded over the counter and was listed on the New York Stock exchange in April 1984. Several new stores were open in the markets throughout the Sunbelt and a number of stores operated by Sweet Homes Inc grew from three in 1979 to 50 by the end of 1985.
INDUSTRY AND COMPETITION
The home improvement industry was large and growing during the 1980s. The industry sales totaled approx. $80billion in 1985 and strong industry growth was expected to continue, especially in the DIY segment, which had grown at a compounded annual rate of 14% over the last 15 years. With the number of two-wage earner households growing, there was in increase in families’ average disposable income making it possible to increase the frequency and magnitude of home improvement projects. Further, many home owners were undertaking these projects by themselves rather than hiring a contractor. Research conducted by the DIY Institute, an industry trade group, showed that DIY activities had become America’s second most popular leisure activity after watching TV.
The success of Sweet Homes Inc. attracted a number of other companies in the industry. Among the Store chains currently operating in the industry were Builder’s Square, Mr. How, The Home Club, and Payless Cashways. Most of these store chains were relatively new and not yet achieving significant profitability.
Among Sweet Home’s competitors, the most successful was Mr. How, which had operated hardware stores for a long time recently entered the DIY segment of industries. Using a strategy quite different from Sweet Homes, Mr. How ran gleaming upscale stores and aimed at higher profit margins. As of the end of fiscal 1985, the company operated 55 stores located primarily in south eastern states. Mr. How announced that it planned to expand its sales by 20-25% a year by adding 10 to 14 stores a year.
While Sweet Homes Inc. has achieved rapid growth every year since its inception, fiscal 1985 was probably the most important in the company’s seven year history. During 1985, the company implemented its most ambitions expansion plan to date by adding 2 new store chains which was in financial difficulty. As Sweet Homes engaged in major expansion, its revenue rose 62% from $432 million to in 1984 to $700 million in 1985.
However, the company’s earnings declined in 1985 from the record levels achieved during the previous year. In 1985, it earned $8.2million, or $0.33 per share, as compared with $14.1 million or $0.56 per share in 1984.
As fiscal year 1985 came to a close, Sweet Homes faced some critical issues. The competition in the DIY industry heated up. The fight for market dominance was expected to result in pressure on margins and industry analysts expected only the strongest and most capable firms in the industry to survive. Also Sweet Homes has announced plans for further expansion that included the opening of nine new stores in 1986. The company estimated that site acquisition and construction would cost about $6.6million for each new store and investment in inventory would require additional $1.8million per store. The company needed significant additional financing to implement these plans.
Sweet Homes relied on external financing – both debt and equity – to fund its growth in 1984 and 85. However the significant drop in its stock price in ’85 made further equity financing less attractive. While the company could borrow from its line of credit, it had to make sure that it could satisfy the interest coverage requirements.