weekly feature | Jan 18, 2023 |
CSC Generation is a billion-dollar home brand. Why haven’t you heard of it?

The furniture industry—bless it—is not particularly known for high-stakes business drama. While hostile takeovers and Hail Mary mergers may be common enough in tech and finance, they do not regularly fill the pages of Furniture Today. All the more reason why it was so striking when, last fall, two out-of-the-blue acquisition gambits made the home industry briefly feel like an episode of Succession.

The first came in September, when the news broke that a company called CSC Generation—the owner of, among other things, Sur La Table, Z Gallerie and One Kings Lane—had made an offer to purchase the Iowa furniture manufacturer Flexsteel for $20.80 a share. One company offering to buy another is normal. The way CSC went about it was not.

Acquisition deals often play out in private with a lot of backroom haggling. CSC, by contrast, issued a press release. In it, they stated that Flexsteel had failed to respond to an earlier offer, and that they were going public in order to “facilitate constructive discussions” with the board. By making an all-cash offer at a price 22 percent higher than Flexsteel was currently trading on the stock market, CSC sent a tacit message to the manufacturer’s shareholders: If you want a premium on your stock without lifting a finger, you should let the board know.

Only a month later, CSC made another play, this time for Virginia-based furniture brand Bassett. The tactics were almost identical. On October 11, CSC issued a press release saying that earlier outreach to the board had stalled out, and that it wanted to buy the company for just under $200 million—a 27 percent premium on the stock price. Again, all cash.

It’s hard to overstate how unusual all of this was in a cloistered, old-school industry where deals can close with a handshake on a golf course. A furniture M&A expert put it to me bluntly: “This is not really the way that these people do these things.”

CSC Generation is a billion-dollar home brand. Why haven’t you heard of it?
Justin Yoshimura Courtesy of CSC Generation

At the center of the drama was the founder, chairman and CEO of CSC Generation, a 32-year-old entrepreneur from Southern California named Justin Yoshimura. Yoshimura’s background is building e-commerce tools—in the early 2000s, he quit high school to create an online marketplace for unlocked cell phones. After selling that business, he moved on to found a loyalty marketing platform, 500friends, for retailers out of the startup incubator Y Combinator—he ultimately sold that business as well.

CSC, which Yoshimura founded in 2016, is a little different. Mostly, it has been acquiring distressed home retailers at a steady clip—in addition to Sur La Table, Z Gallerie and One Kings Lane, it has picked up discount home goods membership club DirectBuy and a stake in furniture liquidator Home Consignment Center. One industry consultant described CSC to me as “a home for the fallen angels of the business.”

All in, CSC brands employ thousands of people, and Yoshimura says that its revenue run rate is more than $1 billion annually—recently, he has written that the company could clock more than $2 billion in 2023. If it happens, he’ll have pulled off an interesting feat: Building a home retail operation more than double the size of Ethan Allen that no one has heard of.

Yoshimura doesn’t appear at furniture business conferences and doesn’t speak to the press often, making him something of an unknown quantity. That, and a focus on digital transformation, tends to raise eyebrows in a disruption-wary industry where everyone knows everyone. CSC’s aggressive acquisition plays had only generated further skepticism in the trade press, and the coverage of Yoshimura sometimes depicted him as a vaguely sinister enigma—one article in Home News Now referred to Yoshimura as the “no-comment king” and a “buyout bully.”

I’ve been aware of Yoshimura ever since his company bought One Kings Lane in 2020. At the time, I reached out for an interview, and he politely declined. Then, amid the Bassett drama, Business of Home ran an article that erroneously referred to CSC Generation as a private equity firm, and Yoshimura reached out to correct the error. I again asked for an interview, and this time—to my surprise—he said yes.

When I asked around about Yoshimura in advance of our conversation, most people told me two things. The first was that they didn’t totally understand what he was trying to do. They had a point: CSC is a difficult entity to wrap your head around, with portfolio companies that span a wide range of regions, demographics and categories.

Even CSC’s own business model is a little hard to pin down. Yoshimura has raised money from institutional investors and VCs to fund his acquisitions, which, paired with an emphasis on tech, make CSC look like a Silicon Valley startup. But most tech startups don’t buy companies like Sur La Table. Meanwhile, the company’s strategy of picking up distressed brands makes CSC feel like a private equity firm that buys low, remodels and sells high—but Yoshimura says he wants to hold his companies for the long term. All of that puts CSC in a unique category.

The second thing people told me was that Yoshimura was interesting to talk to. There, too, they were right. When we spoke, he was remarkably casual and open, and our conversation was a far cry from the classic choreographed executive interview, with a PR person lurking on the line and boilerplate catchphrases flying to and fro.

Overall, Yoshimura did not strike me as a strident entrepreneur intent on upending the established order, but as a builder and a systems guy—a pragmatic tinkerer trying to put together the retail puzzle pieces. Nor did he fit the stereotype of the ultracocky VC-fueled founder who doesn’t know what he doesn’t know (several times, he acknowledged gaps in his own expertise—merchandising and branding, in particular, he admitted, are not his strong suit).

I had walked into the interview assuming that because CSC’s business model was hard to understand from the outside, there was some kind of deep tech magic or wildly disruptive concept driving Yoshimura. In his telling, it felt more like common sense: Buy undervalued, lagging home companies and give them a digital glow-up—simple, at least in theory.

“A lot of these old-school furniture companies have a ton of customer data, but often it’s on a physical server in their warehouse,” he says. “Sometimes the software they’re using is 30 or 40 years old, and the company that made it is out of business. There are all these tools out there that they could utilize to grow their revenue, but they just don’t have a way to get their data into AWS [Amazon Web Services], for example. So, we have built the platform, as well as the process, to unlock the value of existing customer data.”

Likewise, a lot of the press seemed to flatten Yoshimura’s retail approach to “let’s close all the stores and go online.” It’s true that CSC had closed more than half of Z Gallerie’s locations after acquiring the brand, and that e-commerce was a focus. However, Yoshimura took pains to point out that his company was currently in the process of opening locations for Sur La Table. “We believe in growing digital, but that doesn’t mean that we don’t believe in the dealers, or that we don’t believe in stores. It’s quite the opposite,” he says. “They all need to exist in harmony.”

I found it hard to square Yoshimura’s straightforward, intellectually curious vibe with the pressure tactics employed in the Bassett and Flexsteel offers. In his telling, the situations devolved after both companies had refused to engage seriously with private offers.

With Bassett in particular, Yoshimura says that good faith negotiations hit a roadblock. “They said, ‘Your price is too low.’ So we said: ‘We’re willing to sign an NDA, not go public and do things in the best interest of all shareholders. … Tell us what price you need, and why we should pay it,’” recalls Yoshimura. “[We were like,] ‘Let’s try to get a deal done.’ Then they were like, ‘Now we’re not going to tell you what you need to bid.’”

Yoshimura seemed particularly irked by the dynamic of interacting with publicly traded companies that, at least in his view, were acting more like family businesses or old boy’s clubs than the guardians of their shareholders’ interests. “For example, last year during the pandemic boom, these stocks were trading at a one hundred percent premium to where they are now,” he says. “But the board was not really looking at: ‘Hey, should we hire a banker to look at selling the company based on this stock price?’ Why didn’t they sell the company then?”

There’s an irony there. Early on, CSC Generation had explored other industries—its earliest acquisitions included Ice.com, an online jewelry marketplace; and Bungalow Clothing, an apparel brand. But Yoshimura says his company has mostly been focusing on home in recent years precisely because it’s one of the last major consumer categories to wholeheartedly embrace e-commerce. The fact that it’s an old-school industry created an opportunity—but now, that same quality seemed to be holding back his forward march.

While CSC’s acquisition gambits injected some titillating financial drama into the furniture industry this past fall, it was over almost before it started. A week after CSC put out its public offer for Flexsteel, the Iowa manufacturer’s board replied with its own press release, rejecting it unanimously: “The proposal substantially undervalues Flexsteel, is opportunistic, and is not in the best interest of the Company or our shareholders.”

Bassett was even quicker to say no, rejecting CSC’s buyout the same day it had been tendered with almost identical language: “The proposals substantially undervalue the company, are highly opportunistic given recent turmoil in the stock markets and not in the best interests of the company and its numerous stakeholders.”

Both Bassett and Flexsteel declined to comment for this article, so it’s hard to know what went on in the boardroom when they got Yoshimura’s letters. But in speaking with two industry advisors who had followed the deals closely, I got the sense that it came down to two things. Partially, they suggested, the offers were simply too low, and it would take more cash—or a crisis—to put real pressure on the board. Yes, the stock market currently undervalued both companies, but stocks can go up, and there wasn’t a pressing reason for either company to jump at a modest offer.

However, there was an undercurrent of something more cultural and specific to an industry that—as Yoshimura observed—can be insular. The deals weren’t taken seriously, these experts suggested, partially because the people who run Flexsteel and Bassett simply weren’t interested in seeing their companies taken over by a young, VC-backed e-commerce entrepreneur who talked about digital-first retail transformation.

Of course, established furniture companies may also have tactical reasons to be wary of fast-moving outsiders with checkbooks—the industry has plenty of once-beloved brands diminished by acquisition chess moves. It’s worth noting too that not all of Yoshimura’s ventures have panned out as he pitched them. In 2018, CSC acquired the intellectual property of the bankrupt department store Bon Ton and announced plans to open 100 stores, only to ultimately sell to a company called BrandX in 2021. In the early days of CSC, Yoshimura told The Wall Street Journal that the company would be exploring the then-buzzy concept of leasing consumer goods, a business model that seems to have faded into the background. All acceptable pivots for a startup, but maybe a little nervewracking for a business founded, as Bassett was, in 1902.

The industry experts I spoke to tended to acknowledge Yoshimura’s perspective—that a change-averse “old boy’s club” culture (that exact phrase was used more than once) was a real obstacle to the deals getting done—while pointing out that the business fundamentals weren’t cut and dry either. Whatever the full explanation, the deals, they said, were dead in the water.

It’s rare to hear a CEO be candid about what’s going on with their own company—even rarer to hear their genuine insight about the competition. In our conversation, Yoshimura was refreshingly open about the retail landscape and the companies he admired—he was full of praise for Williams-Sonoma, especially, for its operational excellence. He also singled out RH and Gary Friedman as a triumph of brand reinvention.

I asked Yoshimura what his long-term goal was for CSC, and if he had a model for what he was trying to do. He did, and maybe unsurprisingly it was a company I’d never heard of: Constellation Software.

Founded in Canada in 1996, Constellation approached the software market with a unique acquisition strategy. Rather than fusing together a handful of big players into a well-oiled machine, the company started gobbling up dozens of tiny ultra-specialized software companies, made them over and ran them profitably under one roof. Dozens soon became hundreds; between 2010 and 2016, Constellation was buying 30 companies a year.

“Constellation Software [itself] doesn’t really have a brand, but it is a $40 billion company that is growing revenue 33 percent a year. … 10 years ago its stock price was $100, now it’s near $2,000,” says Yoshimura. “It has created this platform to be able to buy software companies and tuck them in—they have the infrastructure and the people and the process. They’ve created a machine to unlock a lot of value in this category. I just don’t think anyone’s done that in retail. That’s what we want to become.”

It’s a compelling vision. Just as Gary Friedman has long sought to carry RH up the proverbial luxury mountain on to the summit to join the likes of LVMH, Yoshimura can endeavor to methodically put together home retail’s answer to Constellation Software.

However, the analogy has some wrinkles. In the world of specialized software, inventory is weightless, productivity is king, and founders often start companies with the goal of selling them. In the home world, brand and cultural capital come at a premium; traditions are entrenched; and the personal is deeply intertwined with the professional. Whether those things are “good” or not, they’re real, and as Yoshimura builds his retail machine, he’ll have to contend with them.

The Flexsteel and Bassett acquisition drama proved that—though, despite the apparent standstill, Yoshimura is optimistic that the deals might ultimately go through. “A top investor in one of the [companies] described it as a ‘fiefdom,’” he says. “We had another investor who reached out and said, ‘I think you should pay a couple bucks more per share, but the company should really take this seriously.’”

“The next step is nominating directors to stand for election who are actually going to do what’s best for the shareholders,” added Yoshimura. “These things take some time.”

However, even if neither Flexsteel nor Bassett end up in the CSC portfolio, I got the sense that Yoshimura will take it in stride. “There are more [acquisition targets],” he says. “It’s an exciting industry. There’s lots of opportunity.”

Homepage image: Yoshimura’s company bought One Kings Lane in 2020 | Courtesy of One Kings Lane

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