Feb
19
High-end furniture designer Herman Miller is looking to grow in the residential furnishing market with its acquisition of Design Within Reach (DWRI_), announced late on Thursday. Herman Miller CEO Brian Walker assumes the purchase of DWR is part of a vision to expand the company’s presence in modern design.
DWR is currently the largest retailer of Herman Miller’s furniture designs, with nearly 20% of its total selection designed by Herman Miller. Walker expects that as DWR prioritizes large Studio formats, the mix of Herman Miller designs will now grow in DWR stores as a result of both companies’ merger.
In addition to giving Herman Miller’s brand more visibility by way of DWR’s base of customers, the company will also acquire a growing portfolio of exclusive furniture designs. The deal “won’t be turning DWR into Herman Miller,” Walker noted. Instead, he said Herman Miller would look to benefit from a wider presence in DWR stores, which Walker called “a marketplace for a modern lifestyle.”
DWR will be run distinctly from Herman Miller and it will continue to carry other designers. Knoll(KNL_), a manufacturer of furniture designs from Frank Gehry, Eero Saarinen and Ludwig Mies van der Rohe, said on a Friday conference call it doesn’t expect the merger of DWR and Herman Miller will impact its earnings.
Herman Miller, DWR and Knoll all are part of a growing trend to bring mid-20th century design into the mainstream. In many respects, DWR, under founder Rob Forbes, was a pioneer. After discovering designers such as Saarinen, Forbes launched DWR with the intention of bringing “out of reach” style into enthusiasts’ homes. However, after Forbes left DWR in the mid-2000s, the company strayed from his vision in a brief and tumultuous run on public stock markets
DWR’s Turnaround After Near Collapse
For DWR, a seller of designs from greats such as Le Corbusier, Charles and Ray Eames and George Nelson, the merger with Herman Miller marks a dramatic turnaround after the company nearly folded in 2009 amid over-expansion, lawsuits and a fall from grace within the design community.
Herman Miller will pay $154 million for an 84% stake in DWR. For majority owner Glenhill Capital, DWR’s purchase price is indicative of the company’s turnaround. Glenhill invested $15 million for a 92.8% stake in DWR in August 2009, as the company struggled to stay afloat under contentious CEO Ray Brunner, who pushed for store expansion and was accused of infringing on other manufacturers designs in a flurry of lawsuits.
Glen Krevlin, head of Glenhill Capital, fired Brunner within weeks of investing in DWR. Krevlin brought John Edelman and John McPhee, two longtime partners at Edelman Leather, in to turn the company around. Edelman and McPhee dramatically cut DWR’s store footprint, rebuilt relationships with the company’s suppliers and emphasized larger store formats, called DWR Studios.
The turnaround has been remarkable. DWR has cut its store count by over 50% to just 38 locations, however, revenue is up at the company as it focused on larger and faster-growing store spaces.
Herman Miller CEO Walker said merger talks between the long-time partners began in earnest as the success of the Studio concept became evident. The financial results of Edelman and McPhee’s strategy are clear. DWR lost $24 million on $178.9 million in revenue in the full-year prior to Glenhill’s 2009 investment. In 2013, DWR was profitable on revenue of $218 million. Since 2010, the company has enjoyed a compound annual growth rate of over 20%.
Edelman and McPhee will continue to lead the modern design retailer as it becomes a part of Herman Miller. Public shareholders of DWR will receive $23 a share in cash as part of the deal, which is expected to close on July 28. Edelman and McPhee executives will convert their DWR shares to an 8.5% stake in a newly formed Herman Miller consumer business unit.
A New Financial Plan
Herman Miller will hold an investor call on July 31 to give investors an updated multi-year strategic plan, including new financial targets to reflect the company’s purchase of DWR.
Overall, investors should expect that Herman Miller may move from being a respected designer of modern office furniture such as its iconic Aeron chairs to a more familiar brand in home settings. The company will now have a larger presence across online, retail and distributor channels with the acquisition of DWR stores.
Walker, Herman Miller’s CEO, said on Friday that the merger may not impact the company’s near-term financial results. Over the long-term, Walker said revenue and margin synergies expected in the deal will make it “accretive to earnings in a big way.”
Joshua Borstein, an analyst at Longbow Research, said in a Friday telephone interview Herman Miller’s acquisition of DWR has a strong strategic rationale. Borstein said DWR’s emphasis on larger store formats will be a key positive to the deal, potentially boosting the company’s revenue growth rate. Still, Herman Miller will now need to grow fast enough to match the added overhead it is taking on with DWR.
Borstein doesn’t expect that Thursday’s merger will push either brand down market.
“[W]e believe this acquisition dramatically advances our strategic interests and benefits customers, our business partners, and shareholders,” Walker said.
