Payless Cashways was a regional hardware store, based out of Kansas City. Much like its cross-state neighbor, Central Hardware, it pioneered the big box home improvement store format, featuring a real lumberyard. It, too, was in a poor position to capitalize on the booming home improvement market. It went out of business September 10, 2001, after 71 years of existence.
Payless Cashways was born out of the Great Depression and grew as a result of the post-World War II boom in DIY home improvement. But the threat of takeover by a corporate raider in the 1980s ultimately proved its undoing.
The Furrow family
Payless Cashways’ founder, Sanford Merritt “Sam” Furrow, along with his sons and John Evans, purchased the struggling Kiefer-Wolfe Lumber Company in Pocohontas, Iowa in 1930. Later, in 1932, they bought two more lumberyards, the Rutland Lumber Company and C.H. Clifton and Son lumberyard. Furrow then put his sons in charge of the other two stores.
Furrow said he could not have started the business in good times. In 1930, banks were desperate to recover what they could from foreclosures, so he was able to negotiate very low prices.
While Furrow was buying lumberyards, he continued to work for the Fullerton Lumber Company. In 1933, they discovered his side project, so he quit his job, which he had held since 1912, and renamed Kiefer-Wolfe to Pocohontas Lumber Company.
After World War II, Evans and the Furrows split the company, with Evans taking two stores.
In 1947, Payless Cashways opened a new store, managed by Vern Furrow. This particular store proved pivotal. Vern ran his store on a cash and carry basis, which gave rise to the name Payless Cashways after the rest of the chain adopted it. Operating on cash and carry allowed them to lower prices and attracted the growing Do-it-Yourself crowd while lowering risk, as many stores were struggling to collect their accounts receivable.
This brought the chain to critical mass, and it expanded between Iowa and Arizona, primarily in small towns, through the 1960s. The company’s growth model in its early years was organic. When someone in the company was ready to manage a store, they opened a store, contributed to the startup costs, and shared the profits.
Both Sam and Sanford Furrow died in the late 1950s, leaving Vernon in charge. In 1969, he took Payless Cashways public, with the help of David Stanley, a vice president at Piper Jaffray, an investment bank in Minneapolis. Stanley became one of two outside directors after the company went public. Vernon Furrow retired from active management in 1971, ceding leadership to Robert Lincoln, who had been the company’s president and treasurer.
During the 1970s, expansion shifted to opening multiple stores in large markets, including Dallas, Kansas City, Indianapolis, and Houston. They preferred locations with 24,000 square feet of retail space, 30,000 square feet of warehouse, and a 10,000 square foot lumberyard.
Lincoln stepped down in 1976, replaced by longtime employee Stan Covey. In 1977, Payless Cashways moved its headquarters to Kansas City, Mo. Kansas City provided a more central location for the chain’s headquarters than Iowa.
In 1980, Stanley became president. Stanley brought in outsiders and pursued aggressive expansion. Longtime management previously had pursued a more gradual approach. In 1983, Stanley became CEO, succeeding Stan Covey.
Payless Cashways at its peak
At its peak, Payless Cashways operated 193 stores in 22 states, had 18,100 employees, and reached #416 in the Fortune 500. In 1983, they had 118 stores while an upstart in Georgia named The Home Depot had 15. During the 1980s, it was the fifth largest hardware store in the United States. And in the mid 1980s, it went on a buying spree. It bought Sacramento, Calif.-based Lumberjack Stores Inc for $26.3 million in 1983. In 1984, it followed up with Somerville, Mass.-based Somerville Lumber & Supply Company for $12 million in stock. And in 1986, it bought St. Paul, Minn.-based Knox Lumber Company for an undisclosed amount.
In 1986, Home Depot had 50 stores. Lowe’s had 300. But while the best days were still ahead for those two chains, Payless Cashways was about to start its decline.
Payless Cashways’ fall from grace
In 1988, its management team took the company private, taking on over $900 million in debt to do so. Corporate raider Asher Edelman, who was responsible for the takeover of computer pioneer Datapoint, teamed up with Sutherlands, another regional chain, to acquire 10 percent of Payless Cashways’ outstanding stock. Rather than talk to the Edelman-Sutherland group to learn their motive, in spite of the group’s requests to meet, management, including CEO David Stanley and COO Susan Stanton, took the company private, at a cost of over $1.3 billion. Saddled with all that debt, the company was never profitable for the five years it was privately owned.
Meanwhile, Edelman and the Sutherland family made $22 million from Payless Cashways’ self-imposed leveraged buyout. And Home Depot and Lowe’s were just getting started on their phenomenal growth period.
In 1993, Payless Cashways went public again. The cash from their stock offering cut their debt to $600 million and in 1995 they reached the Fortune 500 index, where they peaked at #416. But it wasn’t enough. Their creditors forced them into bankruptcy as a condition of renegotiating its debt. On July 21, 1997, Payless filed for Chapter 11 bankruptcy for the first time.
Creditors forced out Stanley and Stanton and installed Millard Barron, a former Hudson’s Bay and Wal-Mart executive, as CEO. Barron was able to reduce the debt to $371 million by the end of 1999, but an unusually long and cold winter in 1999-2000 cut the construction season short in 1999 and delayed its start in 2000, robbing the company of needed cashflow. Deflation on the cost of lumber forced them to cut prices to its cost, or even below cost. Over the course of 2000, Payless ran short of both inventory and money.
On June 4, 2001, Payless filed bankruptcy again. This bankruptcy was controversial. Hilco Capital, one of its creditors, recommended that Payless file bankruptcy and use its cash to buy inventory rather than paying for merchandise it had already shipped. Payless’ investment banker recommended against that strategy, believing the company was worth more outside of bankruptcy.
This time, the company didn’t survive. It closed 42 stores that summer, with a plan to emerge from bankruptcy with as few as 39 stores. But on August 28, 2001, they ran out of money. The bankruptcy court appointed liquidators to sell off the remaining inventory and Payless Cashways went out of business two weeks later.
What went wrong for Payless Cashways
Payless Cashways was riding high until 1988, when it took itself private. No doubt that was the turning point for the company. It’s not a given that they would have turned into a giant like Home Depot or Lowe’s. But it’s also not a given that they would have had to get that big to survive. Smaller regional chains still survive today. Its onetime nemesis Sutherlands is an example.
It’s possible, even likely, they overestimated the threat from Sutherlands. Sutherlands was a smaller chain. At present, it has 49 stores. Several analysts have said it’s likely Payless could have sold a few stores to the Edelman-Sutherland group, made them go away, and then considered whether it still made sense to take the slimmed-down company private. If it did, they could have survived, gone private with less debt and emerged healthier and in a better position to expand again and regain what it had lost.
And, arguably, the firm suffered from a lack of focus. Payless Cashways grew to the size it did by catering to DIYers. But starting in 1987, David Stanley shifted its focus back to professionals, and even stopped carrying some items such as lawnmowers and outdoor furniture. Considering Payless Cashways had shifted to the DIY market because of a downturn in homebuilding, it should have known this was trading one set of risks for another. Between 1987 and 1993, Payless Cashways doubled the amount of revenue it received from selling to professionals, and sales reached $2.6 billion, but it wasn’t enough to turn a profit.
In 1996, Payless Cashways gave up, and reverted to a hybrid DIY/profressional approach, more like what Home Depot does now. Arguably this is the direction the company should have taken in 1987 instead. By 1998, the chain started posting a small profit, but the firm changed direction again, shifting its focus back to professionals. The change in direction didn’t increase profits. By 2000 the company was losing money again, and went out of business on September 10, 2001.
Why Lowe’s and Home Depot and not Payless Cashways?
The end of World War II brought about a both a boom in new home construction and a robust do-it-yourself market. This allowed a good number of chains to displace independent hardware stores and lumberyards. Payless Cashways was just one of several.
The rapid expansion and consolidation accelerated in the 1980s. It wasn’t just Lowe’s and Home Depot. Chains like Builder’s Square and Home Quarters grew at rapid rates throughout the 1980s and 1990s before both went out of business in 1999.
And while it’s easy to point at Builder’s Square and Home Quarters and argue that Lowe’s and Home Depot ended up on top because they had better management, that’s a bit of an oversimplification. It was true for those two chains in particular. But Payless Cashways and Central Hardware didn’t have a chance to compete because corporate raiders forced them into leveraged buyouts that limited their ability to expand during a time when chains of a certain size faced a choice of either expanding or dying. Both chains made mistakes, but they didn’t always have a lot of good choices. It’s not just a simple case of Corporate Darwinism in either of these two instances.