National Home Centers Rebuilding, Predicts Profits

After losing money four years in a row, Springdale-based National Home Centers is poised to turn a profit in the first quarter of 1999. And the company, which has closed stores and downsized since 1997, is opening a new sales office in Hot Springs.

“We have a chance to break even or have a profit in the first quarter of 1999,” Brent Hanby, chief financial officer for National, says. “I haven’t been able to say that for a while.”

National had a profitable second quarter in 1998, but that seems to be a pleasant blip on the company’s radar screen of the late 1990s. The company had a net loss for the fiscal years 1995, 1996, 1997 and 1998.

The downsizing has meant big changes for National. It has transformed a company known for its retail stores to one that primarily operates lumber yards.

National now has eight lumber yards, each with an attached retail store. That’s down from 13 retail stores, including two superstores, in mid-1997. The company went from 650,000 SF of retail space in 1997 to 227,000 SF today. With the transition, National cut more than 600 jobs, from 1,100 employees in 1997 to 440.

“We had to downsize the company,” Hanby says. “We won’t be building any more 200,000-SF retail stores.

“It hasn’t been easy. We’ve had our share of humble pie around here for the last few years. The money tree doesn’t grow forever. We’re in much better financial shape than we were a year ago.”

Downsizing Pains

In 1972, Dwain Newman, now 65, opened a lumber yard on Emma Avenue in Springdale. That business, then called National Lumber Co., become National Home Centers in 1991.

Previously, Newman was general manager of Gateway Plywood and Door Co., a division of International Forest Products, a building material supplier based in Arizona that had a facility in Springdale. Hanby is Dwain Newman’s son-in-law. Jeff Newman, Dwain Newman’s son, works for National as senior merchandise manager.

In 1983, Dwain Newman, who now holds the title of chairman and CEO of National, began opening retail stores — first in Springdale, then in Little Rock. He thought the stores would buffer the company during times when high interest rates slowed the building of new homes and, subsequently, sales from the company’s lumber yards to contractors and builders.

In 1993, National opened stores in Conway and Russellville in vacant Wal-Mart buildings.

National grew steadily, with same-store sales increasing regularly through 1992.

But by 1994, it appeared that National had gone in the wrong direction. Northwest Arkansas “got discovered,” Hanby says, and national retail chains, like Home Depot and Lowe’s Cos., began moving into the area with retail stores.

The big national chains could buy in larger quantities and sell at a discount National couldn’t afford to match. Hanby refers to the large chains as “category killers,” adding that Home Depot is “the Wal-Mart of the home improvement industry.”

With $28.6 billion in annual sales last year, Home Depot dwarfs the competition. Lowe’s, the second largest home improvement company in America, has annual sales of $11.7 billion, less than half the size of Home Depot. By comparison, National’s sales last year totaled $105 million.

To make matters worse, attempts to open National’s first superstore — a 175,000-SF store in Fayetteville’s Spring Creek Centre — were held up in 1994 because the city was slow to extend Joyce Boulevard through to Johnson.

In the meantime, Lowe’s opened a store on Zion Road in the same area as Joyce Boulevard — the rapidly growing retail zone near the Northwest Arkansas Mall. The new Lowe’s store had easier access for drivers on U.S. Highway 71B. By the time the National store opened there eight months later, Lowe’s already had a customer base. National’s Fayetteville store didn’t turn a profit during the any of the three years it was open.

“Lowe’s just had the superior location,” Hanby says. “We fought that from Day 1. … The Fayetteville store wasn’t doing enough volume for us to even break even.”

The company as a whole began losing money in 1995. In the summer of 1997, National hired Senn-Delaney, a division of Arthur Andersen, to help it come up with a business plan.

The advice?

Get out of retail.

Back to Basics

“We were losing our shirts on retail,” Hanby says. “It reconfirmed our thoughts that we had to downsize retail and get back to our bread-and-butter business, selling to contractors and builders.”

At the time, contractor sales amounted to about 55 percent of National’s business. The company decided to sell its larger retail stores and concentrate on contractor sales.

After the input from Senn-Delaney, National decided to shoot for 75 to 80 percent contractor sales. But, with the quarter that ended April 30, the company will probably exceed that with contractor sales accounting for a little more than 80 percent of its business, Hanby says. The numbers aren’t yet available for the first quarter of 1999. He says the company is now aiming for 85 percent contractor sales.

By comparison, Home Depot and Lowe’s probably derive only about 15 to 20 percent of their business from contractor sales.

In the fall of 1997, National closed three stores — in Conway, Little Rock and a small store in Rogers, but the company still operates a store in Conway. In the spring of 1998, National closed its Fayetteville superstore and its largest store — the 205,000 SF store that was opened in Rogers in 1995. Although the Rogers superstore was profitable, National sold it because Lowe’s offered a price the company couldn’t refuse, Hanby says. The Fayetteville building was sold to another competitor, Home Depot.

National also closed Cabinet Craft in Springdale, a cabinet manufacturing facility that employed about 60 people and supplied cabinets to National stores. The company reduced the size of its Russellville store from 90,000 SF to 30,000 SF.

From 1995 through 1997, National’s revenue increased from $153.4 million to $177 million. But net income went from $1.5 million in 1995 to a minus $3.1 million for the fiscal year that ended January 31, 1997. Hanby says the loss was due to the high cost of opening the large retail stores.

The overhead involved in operating the retail stores was so expensive, the company decided it would be more profitable to run lumber yards instead, even though there’s less profit margin on sales of lumber because of competition with companies like Ridout and Meeks.

“It’s cheaper to run a lumber yard than a retail store,” Hanby says, from his office in the back of National’s Springdale store, which anchors a 20-acre lumber yard.

To run retail stores cost National about 5 percent of sales more than operating a lumber yard, Hanby says. That amounts to about $5 million per year to the company.

The closings have allowed National to cut expenses and pay off $27 million in debt, he says. At the end of January, the company had $12.4 million in long-term debt, as opposed to $23.3 million in the previous fiscal year.

Crunching Numbers

National went public in 1993, and its stock priced peaked at about $14 per share in January 1994. Since January 1996, the price has languished between $1 and $3 per share. Dwain Newman owns about two-thirds of the company’s 7 million shares.

The company currently has lumber yards with small retail stores in Springdale, Bentonville, Fort Smith, Clarksville, Russellville, Conway, North Little Rock and Maumelle.

For fiscal 1998, which ended Jan. 31, 1999, National had $104.7 million in net sales (down from $150.8 million a year earlier) and $23.6 million in gross profit (down from $33.7 million in 1997). Operating expenses totaled $24.4 million leaving the company with a net loss of $3 million (but that’s up from a net loss of $13 million a year ago). But the numbers from 1997 are skewed a bit because they include sales from two large stores, in Fayetteville and Rogers, that have since been sold. And one-time charges involving the downsizing continued to affect the company through 1998.

Comparable store sales were down 12 percent for the fourth quarter of 1998 and down 13 percent for the entire fiscal year. But Hanby says the company is expecting a small increase in same store sales for 1999.

Average total sales per SF increased in 1998, however, from $202 to $250.

The Future

Hanby says the future looks bright for National Home Centers.

“We’ve sold all the stores we’re interested in selling,” he says.

For the first time since 1995, National plans to open a new store. A sales office in Hot Springs is scheduled to open late this month, Hanby says. Two people will be employed there.

“I think that shows people we’re kind of moving back in the right direction,” he says.