National Home Centers, Inc. Business Information, Profile, and History

Company Perspectives:

At National Home Centers we are very proud to be Arkansas' own home building supplier. We are headquartered in Northwest Arkansas and have been serving the building materials and home improvement needs of the state for 27 years. We appreciate the loyalty our customers have shown us and we're dedicated to offering quality products at fair prices with knowledgeable service to our fellow Arkansans for years to come.

History of National Home Centers, Inc.

The brain child of Arkansas native Dwain Newman, National Home Centers, Inc. (formerly National Lumber Co.) is an Arkansas-based lumber company which sells to both homebuilding professionals and non-professional homeowners, not nationally, but strictly in Arkansas, northeastern Oklahoma, southeastern Kansas, and southwestern Missouri. As of the 2000 fiscal year, approximately 83 percent of National's business was devoted to contractors. Its eight locations combine relatively small retail outlets with 20-acre lumber yards. The company owns roughly 200 delivery vehicles, including 50 vans and pickups, 40 flat-beds, ten 18-wheelers, and 100 other trucks. National received a surge of local press attention from 1993 to 1997, when it aspired to compete with the large home-improvement chains which were flooding the state. In 1994, Do-It-Yourself Retailing proclaimed the company "one of the most promising retail chains in the U.S." National has in recent years significantly downsized its operations, cutting retail space by over 400,000 square feet and its overall work force by 600. These actions have decreased revenue but increased the company's profits. Newman, the company's founder and CEO, owns approximately 63 percent of the business. In the fall of 2001 he also tendered an offer to purchase the rest of the company's stock.

1970s Origins as a Building Supply Company for Contractors

Dwaine Newman founded National Home Centers in 1972, initially dubbing it the National Lumber Company. The first outlet, primarily a lumber yard, was located in Springdale, a rural town in Washington County, Arkansas, just north of Fayetteville. Newton, who was 38 when he started the company, had previously been general manager of Gateway Plywood and Door Co., a division of Arizona-based International Forest Products, which had a facility in Springdale.

At first, National's sales were strictly limited to contractors, who accounted for about 95 percent of its revenues. Sales to builders would in fact remain the core business for the next two decades, over which the company developed into a very limited chain of lumber yards and small retail stores serving the northwest portion of Arkansas. The chain remained relatively secure in its business because it did not have any serious competition.

Newman did not begin selling building supplies to do-it-yourself home repair and remodeling customers until 1983, when National started opening retail stores, first in Springdale and then in Little Rock. Their principal purpose was to counteract the financial slumps the company had experienced when high interest rates and a recessive economy curtailed building trade needs. In any case, the business focus through the 1980s and into the early1990s remained on sales to contractors.

Early 1990s: Expansion Runs Into Heavy Competition from Chains

In 1991, Dwain Newman and his board changed National Lumber Co.'s name to National Home Centers, Inc., and began a three-year period of rapidly escalating growth for the business. The company ceased thinking of retail stores as a safeguard, a supplement to its main money-making ventures in the contracting field, and began to consider them an avenue for increased expansion and profits. To help increase business, the company acquired former Wal-Mart buildings in Conway and Russelville, outlets that significantly improved the company's retail traffic. This approach looked very promising at the start, and by 1991 had won National its 35th ranking on Arkansas Business magazine's Top 50 private companies list.

By early 1992, National's ambitions had grown, and the company began opening ever-larger retail outlets in an attempt to emulate the "big box" strategies employed by Wal-Mart and the two national chains which would ultimately force the company to bring its business plan full circle: Lowe's and Home Depot. At the start of 1992, the whole chain consisted of just five stores, but within two years had grown to ten stores, and in 1993 alone had increased its sales by 45 percent over the previous year.

National went public in 1993, hoping to acquire the capital necessary for its continued growth. Its first offering, made in May of that year, sold just under two million shares at $10 per share. At that time, founder Dwain Newman already had and would continue to hold a controlling interest in the company. With its capital infusion, National began opening more new stores. Within a year, it had increased its holdings by two retail locations and had broken ground on its largest store built up to that point, a 175,000 square-foot superstore in Fayetteville. Its goals still unmet, National took out a $25 million loan from the First Tennessee Bank National Association in early 1994.

The building of another National superstore was significantly delayed by issues with the Little Rock city government. The store's proposed location on Arkansas Highway 10 conflicted with that city's statutes governing land use. A minor scandal arose when the city director, Joan Adock, who supported National's claim, admitted that the company regularly purchased some of its inventory through her husband, the local sales representative for Newell & Co., window hangings suppliers.

Despite this setback, National moved ahead. In 1993 alone, the company expanded by almost 45 percent in properties and employees. In the 1980s, 70 percent of National's business had been derived from professional contractors. The early 1990s saw the business decrease its contractor sales by 30 percent, with the result that overall the company's revenues were generated from consumer sales of 60 percent and contractor sales of 40 percent. By comparison, the national "big box" chains made 80 percent of their money from amateur home-improvement enthusiasts. Negligible contractor-based sales on the part of the Home Depot and Lowe's juggernauts gave National hope that focusing on versatility would make it a viable competitor in the Arkansas market.

National's continued expansion and increased versatility resulted in an anticipated sales figure for 1994 of $165 million, a three-fold increase from their sales in 1989. By the summer, the company had made plans to build a new factory for their carpentry off-shoot, Cabinet Craft, and a 28,000-square-foot corporate headquarters. However, National was facing a troubled future, largely because by 1994 Lowe's and Home Depot had discovered northwestern Arkansas and had begun making plans for opening outlets there. Like so many other small chains, National had to face the prospect of being crushed by giants whose volume-buying pricing had elsewhere turned them into competitive bulldozers.

Although that competition was still only on the horizon, by 1994 the company was already experiencing some financial problems. Its1994 fiscal year results fell way short of its expectations. Its sales peaked at $125 million, $40 million shy of the predicted gross. The company's stock value also fluctuated disconcertingly. At one point in 1994, after a few pundits declared National a hot property, the price rose briefly to over $14 a share, but for reasons, as Dwain Newman himself admitted in an interview with Arkansas Business, "that had nothing to do with [the company]." As the year ended, the stock dropped to $11. It fell repeatedly thereafter, and would never climb so high again.

Mid-1990s: Company's Growth Leads to Mounting Financial Problems

By the spring of 1995, National was beginning to feel its growing pains in earnest. Newman relinquished his role as the company's president, though he remained CEO and chairman; Danny Funderberg, the COO, assumed the position vacated by Newman. The complexities of running National had grown along with its store base, which had recently grown to ten. Newman no longer wished to handle both the more mundane duties involved in running his business and the constant strategy planning necessary to keep a growing company competitive.

National was spreading itself thin, and industry observers recognized this fact; the 1995 fiscal year ended with the company's stock at $3.81 a share. Though sales had risen to $151.4 million, up considerably from 1994, National had failed to turn a profit. Newman and his fellow executives recognized 1995 as a tough year for staying afloat. They retreated from their aggressive practices, halted expansion, and focused on preparing for the arrival of Home Depot and Lowe's in communities where National had outlets.

Though the company's earnings increased steadily throughout 1996, it was about to be battered from all sides by strong competition. National's home state had attracted a fleet of home improvement superstores far out of proportion to its size. By the end of that year, three Lowe's locations had sprung up in Fort Smith, Russelville, and Conway, attracting customers in droves through their mass merchandise pricing. National still hoped that servicing both contractors and amateur enthusiasts would give it an edge in the market. However, the company would not see a profit for the next three years.

Late 1990s Return to Profitability

In 1997, National began a full retreat. Although the company's aggressive growth and marketing strategies had worked to a point, they did not work well enough to pay off the money the company had borrowed. National's debt-to-assets ratio was 42 percent that year, a high proportion which seems even higher when compared to similar figures from other businesses. Lowe's and Home Depot, National's biggest competitors, claimed a debt-to-asset percentage of 20 percent and 11 percent, respectively. Stung by its financial difficulties, the company's stock ended the fiscal year at a new low of $1.50 a share.

In dire need of sound business advice, Newman hired the Senn-Delaney consulting firm to design a new National strategy. The firm made it clear that the key to National's future success would be to reduce its role in the Arkansas retail market. Heeding the firm's instructions, National began shutting down its new stores and putting them on the market, hoping to cut its losses and facilitate debt payments. From October 1997 to the beginning of 1998, the company closed locations in Conway, Little Rock, and Fayetteville. The store at Fayetteville, at 175,000 square feet, had been National's biggest "big box."

In 1997, National put in place four strategic priorities to guide it back to health: it would close under-performing units, recapitalize, reduce its debt, and refocus it business on contractors as its primary customers. Thus, throughout 1998, National closed down and sold off its retail outlets and began a move back to its older business strategy, that of selling to contractors and operating small hardware stores to give added income in bad real-estate market years. In the next year, in order to help sustain its business and pay down its debt, the company entered a credit loan and security agreement, giving it a credit line of $20 million.

By the summer of 1999, the company had reduced its holdings to eight lumber yard/retail store combinations. Although its near 30-year evolution as a company had been reversed, National's management was optimistic about the future. Said Brent Hanby, the firm's CFO, in an interview with Arkansas Business in May 1999, "The money tree doesn't grow forever. We're in much better financial shape than we were a year ago."

The next year, 2000, clearly showed the positive results of the strategy put in place in 1997. For one thing, National pulled out of the red, posting a $1.1 million net earnings in 2000. Although its net dropped to $225,840 the next year, it was still logging a profit. In 2001, the company also refinanced its revolving credit line with Wells Fargo Retail Finance, LLC, advancing it to $25 million and extended the credit's term to July 2005 and lowering the lending rate.

Through the first half of 2001, the company was also doing better in sales than it had in 2000, turning in same-store increases that, Dwain Newman observed, were in part attributable to favorable weather conditions, reduced interest rates, and an increase in large building project starts. The improvement was acknowledged by Dun & Bradstreet, which upgraded the company's rating to 4A2, its first upgrade in four years.

Newman's own faith in the company's future was evident in his tendered offer to buy all the company's stock not already under his control. The majority owner, holding 63.49 percent of the stock, Newman first offered to buy the remaining shares at $1.20 per share, then, on October 5, 2001, raised his offer to $1.40 per share. If agreed to by the other stock holders, the sale would result in the return of National to the private sector, a move that Newman has long felt would be in the best interest of the company.

Principal Competitors: Cameron Ashley Building Products, Inc.; The Home Depot, Inc.; Lowe's Companies, Inc.; Sutherland Lumber Company, L.P.; 84 Lumber Company.

Chronology

• Key Dates:
• 1972: Dwaine Newman founds National Lumber Co. in Springdale, Arkansas.
• 1983: National Lumber begins opening retail stores in an effort to target non-professional home-owners.
• 1991: National Lumber Co. is renamed National Home Centers.
• 1993: The company goes public and puts two million shares on the market; Dwaine Newman acquires the controlling share and becomes chairman and CEO; National takes over old Wal-Marts in Conway and Russelville, beginning the chain's investment in "big box"-style retail outlets.
• 1995: Following a heated competition with national chains, the company begins losing money.
• 1999: After years of losses and downsizing, National successfully refocuses its attention on contractor sales.
• 2000: Company returns to profitability.
• 2001: Newman tenders offer to purchase all outstanding company shares.