After a net loss of nearly $20 million in 2015 and 2016, the furniture retailer I.O. Metro LLC in March hired a Dallas turnaround company to analyze the business and develop a plan to make the company profitable.
CR3 Partners LLC of Dallas determined the retailer couldn’t be saved.
I.O. Metro, which was founded in Arkansas in 2005 and moved its headquarters to Dallas in 2015, filed for Chapter 11 bankruptcy in April and is holding going-out-of-business sales at its 13 locations in seven states, including stores in Little Rock, Fayetteville and Rogers.
The company is expected to convert to a Chapter 7 liquidation after the liquidation sales are complete at the stores, which began operating last year under the name Erdos at Home, after the company’s then-CEO John Erdos.
Chief Restructuring Officer Gregg F. Stewart said in a June bankruptcy proceeding that he didn’t expect any money to be left for unsecured creditors. The company’s debt totaled $33.9 million, with $31.5 million of that unsecured debt, according to filings. Company assets were listed at $3.8 million.
That’s bad news for its owners, Diamond State Ventures II LP of Little Rock, which has an unsecured claim against I.O. Metro of $5.2 million, and Banyan Equity Investors II Inc. of Miami, which is owed $20.2 million.
“We certainly had hoped for a different outcome,” Diamond State Managing Director Larry Carter told Arkansas Business last week.
Officials at Banyan didn’t return calls for comment.
Stewart, hired by I.O. Metro’s board in April, said I.O. Metro’s “inefficient operations” landed it in U.S. Bankruptcy Court in Dallas.
“And I believe that given the nature of the company’s … brand position, kind of high end and eclectic furniture, they were in the wrong markets to push their products,” he said at that June bankruptcy hearing, a recording of which was obtained by Arkansas Business.
It didn’t help that the company’s corporate governance was “so poor,” said Stewart.
“This company, particularly in the last two years, had a revolving door in … what I kind of call administrative types, chief financial officers, controllers,” Stewart said. “They’ve come and gone … at some velocity.”
Just a few years ago, the company seemed positioned for a national expansion.
Diamond State’s Carter said the private equity company began investing in I.O. Metro in 2011 with the goal of growing the company. And the investment appeared to be working.
I.O. Metro was a finalist for the 2014 Arkansas Business of the Year award for companies with 76-300 employees. In 2015, it named John Erdos, the founder of Erdos at Home of Singapore, as its CEO. He boasted in news articles that his clients included celebrities such as the Italian fashion designer Giorgio Armani and Susan Sarandon, the actress.
“We are pleased to welcome John Erdos to the I.O. Metro family,” said Lou Spagna, the CEO at the time, in a 2015 news release. “We are confident he will continue to lead the company to even greater success.”
He was the company’s last CEO. The I.O. Metro board of directors approved the termination of Erdos on April 6, according to the company’s bankruptcy filings.
Erdos couldn’t be reached for comment, and I.O. Metro’s bankruptcy attorney, John Leininger of Dallas, declined to answer any questions.
Founded by Arkansans
While still in his 20s, Helena native Jay Howard helped come up with the idea for I.O. Metro after a 30-minute discussion at the dining table.
Howard and Bill and Helen Benton of Jonesboro partnered to open the first I.O. Metro in March 2005 in Bentonville. The store’s mid-priced imported eclectic home furnishings and accessories items began selling quickly.
In 2005, I.O. Metro had $2 million in sales, Howard told Arkansas Business in 2006.
Howard said he traveled to India, China and Indonesia to buy products for the stores. And I.O Metro’s growth continued.
In January 2011, the retailer was sold to Consumer Growth Partners, a private equity firm in White Plains, New York, and to an investor group that included Banyan Equity and Diamond State Ventures. Terms of the deal weren’t publicly disclosed.
Howard remained as the CEO and praised the sale. “This collaboration will allow us to accelerate our expansion strategy, which includes plans to triple the company’s size in the next five years,” Howard said in a 2011 news release.
At the time of the transaction, I.O. Metro operated 21 stores across eight states.
Howard stayed with the company until late 2012, when he was replaced by Spagna, who announced his plans to expand the company.
Spagna told Arkansas Business in 2014 that he would like to have “50 or more” stores from Florida to Arizona by 2021. At the time, I.O. Metro had closed a few stores and had 18 locations in eight states.
“We have to transition from a startup to a stage two growth company,” Spagna said in 2014. “We don’t want to dampen the entrepreneurial spirit of the company.
“As we move forward, we don’t want to forget who we are.”
New Leadership
In 2015, Diamond States and Banyan Equity acquired the complete ownership of I.O. Metro and soon hired Erdos to be the CEO.
Erdos, a self-taught furniture designer, had nearly 25 years of experience designing and selling furniture, according to a 2016 sponsored profile in D Magazine in Dallas.
The company, however, was struggling. In 2015, it reported approximately $26 million in sales and a loss of $8.2 million.
“I knew we could do better and we have,” Erdos said in an email to customers in 2016, according to the trade publication Furniture/Today. Erdos had rebranded the stores as Erdos at Home. “Now I hope to make you an Erdos at Home customer.”
Erdos told Furniture/Today in 2016 that “to be quite frank, I was not that pleased with the design aesthetic or quality level of … a lot of the product IOM was selling. So we decided to make a wholesale change and launch a new brand.” He described the new products as “‘distinct but cohesive’ with twists on classic styling,” Furniture/Today said.
The move backfired on Erdos. Erdos’ revenue dropped 50 percent in 2016 to $13 million as the net loss increased to $11 million.
“I believe the company struggled with liquidity issues,” said Stewart, the chief restructuring officer. “It just started losing market share as well, because of liquidity issues. If you can’t stock a retail floor, then, obviously, sales are going to suffer.”
Meanwhile, other furniture retailers were seeing sales increase, according to an October report on the 2016 U.S. furniture market by Fung Global Retail & Technology of New York. “The U.S. furniture market has been growing since 2009,” the report said. “Furniture sales are increasing and consumers have switched expenditures back to furniture.”
That sales trend didn’t help Erdos become profitable, though. Through the first three and a half months of this year, revenue was $3.9 million and its loss was $2.7 million, according to the bankruptcy filings.
The operating losses were funded by Banyan Equity. Diamond State’s Carter said it stopped investing in I.O. Metro more than two years ago.
Carter wouldn’t say how much money Diamond State had invested in I.O. Metro.
He said Diamond State was first attracted to I.O. Metro by the “promise of growth” and the company’s potential. “Now it’s in the hands of the Bankruptcy Court and the trustee,” he said.
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