12560 West Creek Parkway
Founded in 1875, furniture retailer Rhodes Inc. became one of the largest furniture retailers in the United States. By 1996, with its acquisition of several smaller chains in various parts of the country, it held fourth place among U.S. furniture stores. The company had gone through a lengthy period of uneven financial performance, however, and its primary stockholder had placed it up for sale. Ultimately, Rhodes would become a subsidiary of the second largest chain of furniture retailers, Virginia-based Heilig-Meyers Company. Added to its $844 million in annual sales, the acquisition of Rhodes, with $430 million, would catapult Heilig-Meyers past the billion-dollar Levitz Furniture and into first place. As for Rhodes, its sale and the subsequent move to Richmond in early 1998 marked the end of more than 120 years of operation in its home base of Atlanta.
A New Way of Doing Business Following the Civil War
Just a few years after its destruction by General William T. Sherman in the Civil War, Atlanta was already a resurgent commercial center. During that period of Reconstruction, a young man named Amos Giles Rhodes moved to the city, bringing with him all he owned: a horse and buggy, $75 in cash, and (according to company lore) "a gold watch of uncertain value."
Like many another dreamer throughout history, Rhodes had come to the big city to make his fortune, and he soon began looking about for the means to do so. He first considered the market in clocks and picture frames, because he had noticed that people seemed to need both. There was only one problem: in spite of the hustle and bustle of Atlanta, the South was still poor and reeling from its recent defeat. People might desire clocks or picture frames, but in difficult economic times, they would not buy what they could not afford.
It was then that A.G. Rhodes, as he came to be known, had a brainstorm and, in the process, discovered a new way of doing business--one of the first installment payment plans in business history. With each of his customers, he set a figure that they could afford to pay on a weekly basis. Having made this agreement, the customer could expect to see Rhodes once a week, at which time he or she would pay what they had agreed upon as the weekly payment. Once the cost was paid, the item was theirs--and thus penurious Atlantans were able to purchase items that might have seemed unattainable luxuries.
Rhodes continued to make his weekly selling and collection rounds, but he was already beginning to consider new business opportunities. In the fall of 1875 he contracted with the owner of a small furniture manufacturing company to produce a line of furnishings, and he opened the first Rhodes Furniture Store in Atlanta. He was 25 years old.
The company continued to grow along with Atlanta, and it soon became a leading business in the brash young city. In 1889, to further strengthen his enterprise, Rhodes formed a partnership with a local businessman, J.J. Haverty. The company became Rhodes-Haverty, and it operated for the next 20 years. In 1909 the partnership dissolved amicably and the companies split. Thereafter they would be among the two leading competitors for Atlanta's furniture market.
Changing Hands in the 1980s
Over the years, both Rhodes Furniture and its hometown changed almost beyond recognition. Atlanta had been a friendly, relatively sleepy town in the latter part of the 19th century; a century later it had become a bustling city with burgeoning suburbs, its old downtown neighborhoods ripped apart by interstates. Likewise, Rhodes had lost its close connection to the past, and the company--which had gone public some time in the mid-20th century--had passed out of the hands of A.G. Rhodes's descendants.
In 1982 Atlantic American Corp., an insurance holding company, acquired 38.6 percent of Rhodes's stock. Within five years, this had increased to 44 percent and Atlantic American held the controlling interest in the company. In 1986 the chairman of Rhodes Inc. died, and in early 1987 its chief financial officer (CFO) resigned. "It's a company that has experienced management changes," analyst Claire Cross of J.C. Bradford in Atlanta told Mark Calvey of the Atlanta Journal and Constitution.
Rhodes had continued to grow and had extensive retailing operations in Atlanta and beyond, but its stocks had failed to perform. In late December 1987 analyst Lee Wilder of Robinson-Humphrey observed that Rhodes's stocks had fallen below broad market averages for the preceding year. At the end of 1987 the company retained the services of the Salomon Brothers brokerage to accept offers to purchase the company. "The appeal of Rhodes" to potential buyers, according to Wilder, "is a tremendous revenue base." Still, in light of the stock market crash of October 1987, Cross called the timing of the proposed sale "unusual." As for the furniture industry itself, she said that retailers operated their businesses in a "very unpredictable environment with a very fickle customer."
Within five months of the announced buyout, in late April of 1988, Atlantic American had found a purchaser for Rhodes. A new Atlanta investment group, Green Capital Investors L.P., had agreed to buy the company for $242 million. It was the sort of business deal that had become something of a cliché in the preceding decade: a leveraged buyout (LBO) purchased in part by "junk bonds." For each share, stockholders would receive $21.50 in cash, as well as a 17 percent junior subordinated discount debenture (or bond), which had a face value of $8.25. The cash accounted for $175.2 million of the price tag, and the bonds accounted for the other $67.2 million. Analyst Thomas Richter of Robinson-Humphrey appraised the value of the junk bonds--which were not callable for four years, would not pay interest for six, and would come due in 12--at only $25.1 million in present value.
Nonetheless, the deal seemed propitious for Atlantic American, which had suffered losses due to high Medicare and workers compensation insurance claims in recent years. As for the acquiring firm, actually a subsidiary of Green Capital called RHD Holdings, the purchase represented a significant addition. Buying Rhodes, according to founder Holcombe T. Green Jr., was Green Capital's "first investment in an important Atlanta-based company."
Reinventing the Furniture Store in the 1990s
Green, the new chairman, spent the latter part of the 1980s and the early 1990s paying down Rhodes's debt. But the venture continued to be a costly one until July 1993, when Rhodes again traded its stock on the New York Stock Exchange. Even so, stocks continued to fare poorly, particularly in the summer of 1994.
On August 13, the Journal and Constitution reported that the value of shares had plummeted a staggering 30 percent. Chief Executive Officer (CEO) Irwin Lowenstein stated that the furniture market had been "soft" and that renovations at nearly a dozen stores had further impaired the company's profitability. For stores that had been open for 12 months or longer, sales growth had been less than three percent.
By that time Rhodes had 78 stores, so the number of renovated facilities represented a large portion. But Haverty, which had continued to develop in competition with its former partner, had renovated even more stores. According to the Atlanta paper, Mark Mandel of Salomon Brothers observed that Haverty was "showing some pretty decent sales numbers over the last few months."
Lowenstein responded to this situation with decisive action. By March of 1995 the Atlanta paper was reporting that the company had set a goal of $500 million in annual sales by the end of the 1997 fiscal year. This came in spite of fears within the furniture industry that rising interest rates and a slowdown in sales of new homes might stall growth. The company was growing, and with 80 stores already, it announced plans to add some 20 locations over the next two years.
During that period the company also expected to enter the Cincinnati, Cleveland, Indianapolis, Kansas City, and Pittsburgh markets, and to add more than 700,000 square feet of retail space. Expansion within several of these markets would be aided, Chris Roush of the Journal and Constitution noted, by Rhodes's established presence in St. Louis and Louisville. Within its home base, the company would be opening stores at Cumberland and North Point Malls, and it had plans to put in new stores near Perimeter Mall on the north side and in the southern suburb of Fayetteville. It would close stores in Marietta and on Roswell Road, however, transferring workers to the new locations.
But acquisitions, Lowenstein told Roush, would not be the means by which the company would meet its goal of $500 million in annual sales. Success would come through improvements. With its competitor Haverty "going upscale" according to a March 7, 1995 Journal and Constitution article, Rhodes began its counterattack by conducting an extensive marketing research effort, with interviews of 3,100 customers in nine cities. Having learned what its customers wanted, the company had plans for a number of changes.
Rhodes would remodel all of its stores by the end of the following year, adding new features such as a play area and a café offering free soft drinks to customers. A new advertising campaign, created by Atlanta ad firm McCann Erickson, used the slogan, "Every time you look, we look better." The company was also hiring a new customer service director, who would visit each of Rhodes's stores and evaluate how employees were treating customers. In addition, Rhodes offered a new 30-day exchange-or-money-back guarantee, the Rhodes Promise. President and Chief Operating Officer (COO) Joel Lanham told Roush, "What we're trying to do is be the best customer service furniture retailer in the country."
A further boost came from the selection of Rhodes by clothing designer Alexander Julian to carry a new line of furniture by the designer. The latter would begin appearing in stores by April 1995. Meanwhile, Rhodes extended its product line to include La-Z-Boy, makers of recliners as well as a full line of living room and family room furniture; and Sealy, manufacturers of mattresses and box springs, including Posturepedic, as well as upholstered furniture. "There's a dramatic difference in what the customer will see now in a Rhodes store," Lanham told Roush.
Growth by Acquisition in the Mid-1990s
By April 1996 Rhodes had grown far beyond Atlanta. Besides Georgia, its southeastern base included Alabama, Mississippi, Florida, North and South Carolina, Tennessee, and Kentucky. In the midwest, it had stores in Ohio, Indiana, Illinois, and Missouri. Finally, Rhodes had a presence in the west through stores in Texas, Kansas, and Colorado.
Much of this growth had come through recent acquisitions. In October 1995, for instance, Rhodes announced the purchase of Weberg Enterprises Inc., a 21-store chain based in Denver, which gave it a foothold in both the Colorado and Texas markets. Also in 1995, Rhodes opened two stores in Kansas City and one in Cincinnati and it purchased Glick Furniture Co., a seven-store chain based in Columbus, Ohio. All told, Rhodes increased its roster of stores by 21 in 1995.
But then an old story repeated itself: on April 30, 1996, the Atlanta Journal and Constitution reported that Rhodes had hired Salomon Brothers, the same firm that had brokered the 1987 sale to Green, to assist it in increasing the value of its stock. One oft-discussed possibility was the sale of the company. This time the driving force behind the proposed sale was the man who had bought it nearly a decade before, Holcombe T. Green Jr., now holder of a 30 percent stake. In spite of improvements in the company's service and Rhodes's growth through acquisition, sales in the furniture market were flat.
Rhodes entertained several possible offers, and on September 18, 1996, the Atlanta paper announced the buyer: Heilig-Meyers of Richmond, Virginia, the number-two furniture chain behind Florida-based Levitz. With 109 stores and annual sales in excess of $430 million, Wall Street analysts had valued Rhodes at anywhere from $110 to $169 million. Yet when it sold, the price tag was far lower than it had been in 1987: Heilig-Meyers agreed to buy Rhodes for $65 million, offering to swap one of its shares for every two of Rhodes's.
Analysts ascribed the lowered price to recent losses by the company, and Lowenstein told the Journal and Constitution, "It's a very good deal for Rhodes and its employees. It's something we need to do." But in the wake of the announcement of the low purchase price, Rhodes's stock value plummeted. It had surged after the company indicated it was looking for a buyer, and it suddenly dropped by a staggering $3.12 1/2 in one day, to close at $7.50. "It had to drop," Lowenstein stated, adding that the stock price had gone up "under the false rumor that we were selling at $12 per share."
With the sale, Rhodes would become a wholly owned subsidiary and would retain Lowenstein's leadership. The Journal and Constitution observed that the acquisition was "a good strategic fit," since Rhodes tended to operate in the large cities and Heilig-Meyers operated in the small town markets. Thus very few of either company's stores would have to close, though Heilig-Meyers's struggling Chicago outlets might adopt Rhodes's methods of operations, while some small town Rhodes stores might switch to the Heilig-Meyers format. The new enlarged Heilig-Meyers, with more than 800 stores and $1.5 billion in sales, would be the largest furniture retailer in America.
Rhodes would continue to operate under the Rhodes name. By the late 1990s, in addition to La-Z-Boy and Sealy, its product lines included Alan White, a leader in midrange fashion upholstery; Basset, which offered traditional cherry and casual modern solid wood bedroom suites; Berkline, a leader in motion furniture; Broyhill, makers of wood solids with veneers ranging from traditional to early American styles; Kincaid, which produced solid wood bedroom, occasional, and dining room furniture in Queen Anne, Victorian, contemporary, and country styles; Kroehler, classic style upholstered furniture; Nunziato leather upholstery; Pulaski, occasional furniture with traditional to contemporary styles; Simmons, mattresses and box springs including Beautyrest and Maxipedic; Universal Furniture, bedroom and dining room furniture featuring country, traditional, and contemporary styles.
For years, Rhodes had operated from its corporate headquarters on Peachtree Road near Oglethorpe University in Atlanta's Brookhaven neighborhood. In late 1997, however, the company's employees began making the move north to Richmond. By the early part of 1998 all of Rhodes's corporate operations--except for its information systems department, which remained on Peachtree Road--had relocated to Virginia.
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