Teur Furniture Case Analysis

Takeovers, Restructuring, and Corporate Governance

Teuer Furniture Analysis

Teuer’s business model  

Teuer operated under a rather straightforward business model. They sold premium home furniture – with all the pieces for a typical home (no focus on any particular part of the home) – to the upper-end market. They did not manufacturer any of their furniture – but rather relied on a domestic set of producers for all design and manufacturing. In addition, they leased all their showrooms and relied heavily on their sales associates to create a differentiated experience for their customers. This ‘limited capital’ strategy to lease, not own their stores and not manufacturer the furniture themselves freed up capital to focus on product selection and employee development. Also, Teuer focused on quick delivery of furniture once their customers made a purchase decision. They operated a central distribution center – which allowed them to carry extensive inventory and deliver furniture quickly. All of these approaches, combined with a “hands off” selling approach allowed Teuer to delight its customers – a critical ability for a company that relied on “word-of-mouth” marketing and advertising to drive sales. “As a result, a large fraction of sales after the first year (a store was open) were repeat customer or friends of past customers.”

Teuer’s competitive advantage

According to Exhibit 7, we see Teuer has some competitive advantages as they are in the top three across the industry for ROIC (30.6%). I see their competitive advantage stemming from a few key areas. First, under the Porter model I believe Teuer benefits from low threat to new entry and minimal supplier power. The low threat to new entry stemmed from their vast network of suppliers, stores and a central distribution center. This is expensive and time consuming to replicate. In addition, because they didn’t manufacturer any of their own furniture – they were less reliant on any one component – and could easily swap out any of their domestic suppliers for another, or perhaps, even go to an oversees producer. Second, I found more of their advantages stem from the Montgomery “Competitive Resources” framework. I found Teuer’s approach to be hard to copy, long lasting, and truly better than the competition. The limited capital strategy while focusing on a high-quality customer experience relied on a well-built sales model (hands off approach) and carefully designed in store experience (both built over a long time). The added benefit of central distribution for quick delivery and wide selection also proved better than the competition and resistant to substitution for the upper end of the market.  

Sustainability

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Teuer’s ROIC has been increasing over the last four years and proved well above the industry average during the economic crisis – an impressive ability given the cyclicality of the industry. Therefore, I would argue their competitive advantages (limited capital invested, expensing much of the investment, not beholden to financial markets) are sustainable. The largest sustainable factor is the moat they have established around number of new stores – stemming from an ability to keep opening stores during the downturn when everyone else was closing existing stores, or at a minimum not opening new stores. In addition to the moat of a large retail footprint – their hiring of quality associates has allowed them to retain a lot of their customers, hence minimizing marketing and customer acquisition costs. So if I look at the ROIC equation – Teuer has done a tremendous job of minimizing the denominator while still selling high quality furniture to the premium segments of the market (allowing for relatively high margins).

Ms. Jerabek forecasting parameters

I felt Ms. Jerabek’s forecasting parameters were by in large reasonable. I assumed that the sales growth, CGS, SGA, and advertising ratios stayed constant from year seven all the way throughout the remaining life of the store. In hindsight, the sales growth of a store may mirror inflation (roughly 2%), but for the model’s purposes I felt comfortable with 0.3% - as Teuer might face increased competition, a saturated market (keeping in mind the infrequency of large furniture purchases) and the law of large numbers.

Discount rate

Ms. Jerabek’s discount rate was reasonable, but a little higher than the rate I calculated (20% higher) – see Exhibit 5 and 6. There are plenty of reasons why this might be the case – everything from the comps she selected to her understanding of the cost of debt and equity during the time she made the calculation. Overall, I think her number is reasonable considering the number of factors. I did feel her long-term growth rate was a little high at 3.5%. I assumed the long-term growth would more mirror the inflation rate of that period – roughly 2%.