Will Bob's Discount Furniture IPO in 5 Years?

Bob's Discount Furniture is known for its odd yet curiously effective TV commercials, ads that convincingly pin the discount Bob-O-Pedic against brand-name Tempur-Pedic mattresses. Privately held Bob's in the final days of 2013 took on a new identity when private equity firm Bain Capital scooped up a majority stake in the discount furniture retailer in a $350 million deal, according to The Boston Globe. The retailer was reportedly on the block since October when then majority owner Apax Partners was looking for its exit strategy.

Clearly Bob's isn't new to private equity ownership, but it is new to Bain's way of doing things. So what can the company expect under Bain, which oversees $70 billion in assets under management? And is there a chance that Bob's will present an investment opportunity and join the ranks of La-Z-Boy (NYSE: LZB  ) and Ethan Allen Interiors (NYSE: ETH  ) in the stock market in the future?    

Was Bob's in trouble?
Bob's, which has a footprint of nearly 50 stores across less than a dozen states, generated $685.3 million in sales in 2012, a 7.3% year-over-year increase, according to Furniture Today. And the company is in growth mode, with plans to open a trio of locations in Philadelphia during the first quarter. 

Furniture Retail Sales (2012)
Bob's Discount Furniture $685.3 million
La-Z-Boy (fiscal 2013)  $1.3 billion
Ethan Allen (fiscal 2013)  $729.1 million

The deal appears to be more about a growth strategy than it does rescuing a troubled business. But if Bob's isn't careful it could find its balance sheet resembling that of other Bain investments. 

If Bain Capital's 2005 consortium-led acquisition of Dunkin' Brands Group (NASDAQ: DNKN  ) is any indication, we can expect a more robust expansion out of Bob's … and more competition for other furniture retailers. Just how Bain expects to finance that expansion push, e.g., debt, is unclear.  

In the year following Bain's -- along with Carlyle Group and Thomas H. Lee Partners -- acquisition of the coffee and donuts chain in a $2.4 billion transaction, or more than 13 times earnings before interest, taxes, depreciation, and amortization, according to The Wall Street Journal, Dunkin' Brands expanded by hundreds of locations, or 8%. 

When it came time for Dunkin' Brands' IPO, the company was saddled with $1.9 billion in long-term debt. Today that company still carries about $1.8 billion in long-term debt.

And Michael's Stores, which is owned by Bain and The Blackstone Group and whose IPO has been delayed, recently issued $800 million in debt with intentions of using the proceeds to pay a dividend to its private equity investors.  

What's next?
On the surface, you won't see dramatic changes at Bob's. Founder Bob Kaufman will remain the face of the company … and those low-budget commercials. Indeed, Bob's executives aren't expecting any leadership changes, according to The Boston Globe

"Their expertise coupled with our expertise will make a great marriage as we look to grow the business and take it to new places." -- Ted English, Bob's Discount Furniture CEO 

Bain officials appear to concur, as long as the business continues to grow its brand and geographic footprint in the way that Dunkin' Brands did following the private equity firm's acquisition of that company back in 2005. Also from The Boston Globe:   

"We think there's a real opportunity to grow this business substantially. We believe in Bob's Discount Furniture's business model." -- Bain Capital Principal Tricia Patrick

Conclusion
Bob's will most likely remain under private equity ownership for the foreseeable future, as the typical holding period for a private equity firm is five to seven years. But it's possible, however, that Bain's work could be done sooner or that an opportunity could present itself in a shorter time frame.

And Bain hasn't disclosed its exit strategy yet, whether it will be to IPO Bob's or sell it to a rival furniture retailer, for instance. But the possibility remains that Bain will choose to IPO Bob's as it did with Dunkin' Brands and intends to do with Michael's Stores. 

If Bob's were to go public, it would be joining a list of furniture stocks that includes La-Z-Boy, whose stock closed 2013 near a 52-week high, and Ethan Allen, which closed up 13% for the year -- a group that's influenced by the three musketeers of 2014: unemployment, interest rates, and housing. Bain Capital's decision to scoop up Bob's now is telling for the sector and it could just lead to another investment opportunity for retail investors down the road … as long as Bain doesn't pile on the debt.

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