By Steven Feldman
Hicksville, N.Y.— Hoboken Floors is shutting its doors after 77 years in business. In what came as no surprise to many knowledgeable observers, the industry’s largest distributor gave termination notices to 120 people Oct. 29, informing them that offices would be permanently shuttered, and the company would “begin to wind down the business immediately.”

Lawrence Grossman, CFO, said in a termination letter obtained by The Bergen Record that the company has been unable to find alternatives “to keep the business operating.” He attributed the company’s decision to close to its “inability to acquire additional funding, which we believe would have avoided the need for a facility closing.”

Grossman said the company had not filed for bankruptcy and would not comment on whether it was planning to do so. He also would not comment on what is causing the company to close.

However, industry insiders with intimate knowledge of the situation say not one but many factors contributed to Hoboken’s demise. (Editor’s note: In almost every case, each source with whom FCNews spoke requested anonymity given the many pending and future legal actions against Hoboken.)

The obvious factor that severely impacted the business was the economy, particularly the new-home construction market to which hardwood flooring is heavily tied. “The housing market tanked in the second quarter of 2006, and at that point sales began to rapidly decline at a double-digit rate,” a major Hoboken supplier said.

A Northeast wholesaler agreed that the homebuilding slowdown played a role, but it had to be much more than that. “Being a wood distributor with a heavy concentration of builder customers and not having a balanced customer base certainly contributed to the demise but was not the total factor,” he said. “It’s down everywhere. You don’t see other distributors going out of business. They were into the bank for $60 million—you can’t blame that on new home construction.”

Some trace the downfall back to 2005, when two major events occurred: the majority purchase by private equity firm Code Hennessy & Simmons from longtime owners Ira and Joel Lefkowitz, and the loss of the Mannington line. “I know for a fact when they lost the Mannington line it was a staggering blow,” said the vice president of sales for a major East Coast distributor. “That was a $17 million chunk of business.” A former Mannington executive told FCNews the company felt its line was being underserviced and not getting the proper focus. “Plus, Mannington hated that Hoboken was selling to the Internet guys. Mannington took a strong position that it would not support that business and expected their distributors’ support in that regard.” Mannington gave the line to Elias Wilf, its Mid-Atlantic distributor, fueling its expansion into the New York metro market.

The impact Code Hennessy had on the Hoboken demise is something that will be debated for years. Many observers say it was a philosophical change that did in the company. “Those guys started managing more from a banking standpoint and less from a distribution management standpoint,” said the president of a former Hoboken supplier. “They were chasing business instead of going after service. They took the entrepreneurial spirit away from Joel and Ira. They made them manage more like a financial institution.”

A competing distributor seconded that thought, adding that when a company asks former owners to run a business for someone else, it’s a very difficult process. “When you run a business for yourself, you make decisions that are in your best interest,” he said. “If you need capital tomorrow you may sell something cheap to raise cash. However, a venture capitalist may say you cannot sell below a certain margin. What happens to your individual needs of today is one thing, but a big company has a different set of pecking orders.”

One thing that is not disputable is Joel and Ira had a unique model of how they went to market. Anther former supplier to Hoboken noted, “The Hoboken model was highly relationship based. Joel and Ira played such a significant role. But when the outside financial group came in, they changed too many of the models of what made Hoboken successful, and the distributorship could not withstand so many changes.”

There is also much sentiment that the original owners were not without fault. “Code Hennessey was hands off,” another distributor said. “The management in place was still running the company. The issue was how top management could not handle and execute plans and strategy for the new company to be successful. Senior management had more direction to be more fiduciary responsible to the bottom line.”

For better or worse, the Lefkowitzes believed in “the more the merrier” philosophy, particularly as it related to brands. At one point Hoboken had more than 30 wood lines, a number many say is unmanageable. “It is tough to run a distribution business with brands that are segmented by market,” the president of a major manufacturer observed. “It throws your inventories way out of whack. You are trying to buy inventory for different markets, and that’s tough because it’s hard to keep up with the nuances of each market. You can’t be all things to all people. Things get diluted. You can’t dedicate enough resources to have substantial inventory and pay enough attention to it to drive it through the market. Nothing gets fully penetrated.” In fact, that was why this manufacturer parted ways with Hoboken some time ago. “We felt like they had too many lines and were not completely focused on our brands and were just skimming it.”

Dollars and sense

At the end of the day, those closest to the situation told FCNews these were contributing factors, but when a company as large as Hoboken shuts it doors, above all else it comes down to one thing: money. And the more people you talk to, the more it becomes apparent.

One of Hoboken’s major suppliers noted how the company was highly leveraged in the first place, and the multiple expansions exacerbated the situation. Code’s acquisition of Hoboken and the purchase of Superior Products [in Maryland] only added to the debt and corresponding interest expense. (Superior Products on Nov. 7 filed for Chapter 7.)

Then there was the 2005 expansion into Texas via a branch in Dallas and later Houston. “It takes money to open this up,” the vice president of sales said. “There was the investment in inventory, there were trucks. It’s not like they were buying an existing business. It ate up their cash flow.” The Texas operation shut down in September of this year.

But it was more than just expansion. The financial crunch was felt on a day-to-day basis. “Hoboken gave its good customers a lot of terms,” another distributor added. “I want to buy $100,000 worth of wood, but I want extended terms. Instead of the normal net 30 or 60 days, they would say, ‘Give me $15,000 at the end of each of the next seven months. There was too much extended terms with a low percentage margin. That only works if you are making 25% to 30% margins.”

Then there were issues with inventory. One manufacturer said a problem was much needed cash was tied up in inventory that wasn’t productive. One distributor told FCNews it simply had the wrong inventory. “In January they had $80 million of inventory that was doing $350 million in business.”

Add all this to four very critical factors:

• Manufacturers began to pull lines, which puts more pressure on top-line revenue.
• Some vendors went dual on them.
• Vendors tightened credit to protect their account receivables.
• Customers started paying slower as business tightened.

As the dust settles

Manufacturers that were doing business with Hoboken were left scrambling for alternatives. Boa-Franc, makers of the Mirage brand, moved quickly to name Belknap White Alcco its distributor for New England and upstate New York. “We will quickly fill the New York metropolitan area,” said Luc Robitaille, vice president of marketing. “But for now, Belknap White is filling orders on a temporary basis to make sure our customers are being serviced properly. So there is an alternative in place.”

Armstrong, on the other hand, is looking at all its options. Frank Ready, president, was talking about taking control of the sales and relationship functions while looking for a logistics provider that makes sense.

And BR-111 may have the best seat in the house given that it decided to go dual earlier this year in all areas where it was supplying Hoboken. Foresight? Maybe. The rumor on the street was that BR-111 experienced service gaps and was worried about Hoboken’s liquidity. In New York it added Apollo. “We are very excited to to have Apollo as a single focused distributor in the largest market area in the country,” said Ricardo Moraes, president.

So where does the fault lie? What if the Lefkowitzes never sold? We will never know. But as one of Hoboken’s former suppliers said, “This was inevitable, the purchase just escalated it. They were in for a real struggle. We felt and saw this all coming. Once the investment firm came in, they cut back on inventory and service, and that is the demise in distribution.”