Rattled home-goods sector ripe for buyouts

ATLANTA (Reuters) - Expect to see more buyouts and bankruptcies in the U.S. home furnishings sector as a battered housing market forces weaker companies to close stores or sell assets in order to survive.

The fact that Pier 1 Imports Inc (PIR.N), a home-decor retailer that only recently began recovering from nearly three years of losses, feels it can give a booster shot to smaller rival Cost Plus Inc (CPWM.O) is seen as a sign of the times.

Pier 1 on Monday offered $88.4 million in stock to buy the operator of Cost Plus World Markets, touting success in turning around its own business and saying Cost Plus was likely to face liquidity problems without a merger.

Pier 1's bid is one of a few proposed deals in the home-goods sector as falling demand squeezes profits and hammers stock prices. Shareholders of Restoration Hardware Inc RSTO.O are due to vote on a buyout proposal from private equity firm Catterton Partners this week.

"We're still in an environment where retailers are over-expanding. I would expect that to continue to correct," said Morgan Keegan analyst Laura Champine, who follows furnishings and furniture companies. "This (Pier 1) announcement touches on the likelihood of that happening."

Companies that manage to pull off deals in such a tough environment stand to gain market share, reduce their competition and perhaps pick up prime retail space.

Consumers facing higher gasoline and food prices are avoiding big-ticket purchases, putting extra pressure on retailers. And since manufacturers face higher input costs for metals and the other materials that go into making home goods, there is little room to negotiate at the wholesale level.

Companies already hit include retailer Linens 'n Things, which filed for bankruptcy last month, and Bombay Co, which closed the last of its U.S. stores in January. Many furniture chains have closed their doors, too.

Retailer A.C. Moore Arts & Crafts Inc (ACMR.O) said this week it plans to close up to 10 stores this year and cut planned openings.

"Until the business turns up and retailers start seeing better individual results like positive same-store sales, you're probably going to continue to see a variety of retrenchment strategies," said Laura Richardson, a consumer analyst with BB&T Capital Markets.

OVERGROWN

Part of the problem is the amount of expansion during the housing boom years. Rising home sales and expanding credit enticed many home-goods retailers to add stores and led big-box chains such as Target Corp (TGT.N) to sell more furnishings.

Suppliers that traditionally sold only to manufacturers also began selling directly to retailers and consumers, increasing the number of players looking to cash in.

"We've had a perfect storm of a whole lot of changes happening in the industry," said Ken Smith, managing director of Smith Leonard, a High Point, North Carolina, accounting and consulting firm that works with furniture companies. "Then you hit an economic slowdown, and that's going to create issues."

But in the past two years, lower home sales, falling housing values and tighter credit have reduced demand.

For instance, U.S. wood furniture shipments fell 7.9 percent last year, while upholstery shipments were down about 2 percent, according to the American Home Furnishings Alliance, which represents furniture makers and distributors.

"I would expect continued issues at all the pure-play furniture names which include La-Z-Boy (LZB.N), Furniture Brands (FBN.N) and Ethan Allen (ETH.N)," Morgan Keegan's Champine said.

SMELLING OPPORTUNITY

In recent months, some companies have said they were holding down costs, buying back shares and protecting their financial condition to be poised to make acquisitions and win market share.

"For companies like ours that have good balance sheets, there could be opportunities," Larry Ryder, chief financial officer for Hooker Furniture Corp, told Reuters at the High Point Market home furnishings show in April.

In the past year, Martinsville, Virginia-based Hooker bought upscale chair maker Sam Moore Furniture from La-Z-Boy, and Opus Designs, which makes youth beds and accessories. Hooker reported a 39 percent drop in first-quarter profit on Tuesday as sales fell, but noted its improved cash position.

Haverty Furniture Co (HVT.N) has cut capital spending in the past year and converted some stores to leases as opposed to owning them to better manage its cash, Chief Executive Clarence Smith said.

In 2002, Haverty bought nine stores from the former HomeLife chain, which went out of business. Smith says Haverty needs to be able to snap up assets if any become available.

"We think there are going to be some opportunities that are advantageous to us, and we want to be prepared to do those," Smith said at High Point Market in April.

(Editing by Braden Reddall)