Following its spin-off from Sears Holding (NASDAQ:SHLD) less than two years ago, not only did it have to contend with a heavy debt burden that it was saddled with by its former parent, but it had to make significant dividend payments to Sears all the while it was operating as a housing-oriented retailer focused on the California market.
I'll admit to thinking that once Orchard Supply was spun off, it would do better, free of its chains to Sears, as it were. But the hooks were still in too deep and it was ultimately unable to effectively compete.
Lowe's (NYSE:LOW), though, could be the big winner here, stepping in as a "stalking horse" bidder and setting the floor for any subsequent bids Orchard Supply may get. It's offered to pay $205 million for the hardware store chain, as well as take over payables for all of its suppliers, just as California's housing market turns on the afterburners. Median home sale prices in the state surged more than 22% year over year in April followed by a 26% spike in May. Lowe's will be acquiring a retailer that will feature a much lower cost structure after its debt is shed in bankruptcy, allowing it to capitalize on the new housing boom.
Yet even with lower costs, Lowe's isn't guaranteed a successful outcome. Efforts at trying to hoodwink the public into believing a large national operation is still a small, hometown chain isn't anything new.
In addition to Orchard Supply, Sears also spun off its home appliances, hardware, tool, and lawn and garden equipment retailer Sears Hometown & Outlet Stores. It reported fiscal first-quarter sales dropping 3% earlier this month as comps fell 5%. Sounds a lot like the "progress" its former parent routinely achieves.
Home Depot (NYSE:HD) also tried its hand at the smaller footprint store. Having run all the mom-and-pop stores out of town after it would move one of its big orange boxes in, Home Depot met with disastrous results with its Villager's Hardware concept in the 1990s when it tried to re-create that local feel. And this was during some booming economic times, too.
But the acquisition does give Lowe's the chance to challenge Home Depot in certain areas that it can easily move into, notably certain urban centers that might be prohibitively expensive to construct new Lowe's stores.
With the big-box retailer retaining the Orchard Supply name and management team, it's clear it doesn't think the concept was a bad one, just that it had been set up for failure. That should be a key indicator that this wasn't a bad apple that will spoil Lowe's entire barrel but rather some low-hanging fruit on which it can gorge itself.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.