Revenge of the Couch Potatoes: A New B2B Player on the Hot Seat - TheStreet

Revenge of the Couch Potatoes: A New B2B Player on the Hot Seat

Krause's Furniture, a comfortable old stock, tries to join the next Net wave.
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LAGUNA NIGUEL, Calif. -- Last week's Roth Capital Partners Growth Conference was full of investors looking for the next hot Internet stock (or for that matter, the next pathetic dot-com to short). But one odd company had the hallways at the Ritz-Carlton Hotel abuzz. No high-tech here. It's the latest, and strangest, dot-com play: tiny Krause's Furniture (KFI) of Brea, Calif.

This is the strangest of Internet revolutions, but the clearest illustration of the new-era cliche: the Internet changes everything. Here, a struggling couch retailer hopes to transform itself into a manufacturer, all the while spinning itself as a new B2B e-commerce player. And the company is actively pining for a stock price that will attain some sort of e-commerce comfort.

The 27-year-old Krause's manufactures custom upholstered furniture, and sells the stuff in 93 retail outlets across the U.S. under the Krause's and

Castro Convertibles

name. The company has been slowly executing a turnaround over the last three years, retrofitting some archaic stores, closing those that were beyond repair, and opening a few more. It's been the kind of long, slow process the Internet world -- and the market for Internet stock -- wouldn't tolerate.

While mired in this re-launch, Krause's hasn't been able to turn a profit, losing $2.4 million on revenue of $35.7 million last quarter. Nonetheless, net sales grew 15% last quarter and the company seems to be slowly heading back toward profitability. The company says it will be earnings before interest, taxes and depreciation, or EBITDA, positive this year, with a $200 million revenue run rate.

But what some investors think is the company's hidden gem is its manufacturing capacity. "What we do is produce custom furniture and turn them around very quickly," says Krause's stately CEO Philip Hawley. "Now think about that in terms of B2B fulfillment. We can take a concept or an idea and turn it into a finished product in a matter of weeks. That's a capacity that none of the online furniture companies have."

Hawley's plan is to take this capacity and utilize it fulfilling the new flood of dot-com furniture outlets like

Living.com

and

Furniture.com

. Much like books and dog food before it, furniture looms as the next e-commerce battle ground on the Web. And why not? The home-furnishings market exceeds $150 billion in annual revenue. Researchers at Forester, known keepers of the Web's crystal ball, say that online furniture sales will grow from virtually nothing five years ago to $6.4 billion in 2003.

As Hawley sees it, competitors like

Ethan Allen

(ETH) - Get Report

,

La-Z-Boy

(LZB) - Get Report

and

Norwalk

are all constrained from entering the Internet world because, he says, each have restrictive relationships with franchisees. "Think of the conflicts that arise," says Hawley. "At Krause's we have no franchises, we have no conflicts."

Hawley is not the picture of an Internet CEO. Slow-talking, tanned and neatly-groomed, Hawley, speaks authoritatively. In a conservative tie and starched white shirt, he gave a deliberate pitch, repeating the phrase "custom upholstered furniture product" with the subtlety of Charlton Heston's Moses. But Hawley is clearly energized by the Net -- indeed, it maybe the only deliverance for his struggling company.

To pursue his goal, Krause's has taken on a very Internet-like partner. Two venture capital firms,

TH Lee.Putnam Internet Partners

and GE Equity (a division of

General Electric

(GE) - Get Report

invested $19 million in Krause's on Jan. 12, 2000, to fund the company's e-commerce initiatives.

"It doesn't matter to us which of the e-commerce players become a winner because we believe that we will be the key fulfillment source in terms of customer upholstered furniture product," says Hawley. "If we are fulfilling 1% of this business, it's the equivalent of adding 100 stores with no bricks and mortar expenses."

By reinventing his company as a Net supplier, he is crossing all sorts of lines that would not have been broached in the old economy. Retailer, manufacturer, fulfillment supplier. Krause's shows how all the lines are blurred in a new economy.

"It's kind of goofy," said one fund manager who rushed out to buy the stock (he asked not to be named as he was still adding to his position). "But this might be best tech idea I've heard at this conference. It's totally speculative, don't get me wrong, but buying

JDS Uniphase

(JDSU)

at this point doesn't do my heart any wonders either."

In the day after the presentation, Krause's shares were up 13%.

To be sure, Krause's has yet to announce any deals with these Internet companies. And this conference was full of promises. But Hawley says such a deal could be right around the corner. "You may see something in few weeks," he told

TheStreet.com

after his presentation, "of certainly in the next few months. I think I can say that without fear of contradiction."

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.