Making sense of CSC Generation’s buyout offer of Flexsteel

Just who is ‘No Comment’ king Justin Yoshimura?

This past week, CSC Generation initiated an unsolicited takeover bid of Flexsteel with an offer of $20.80 per share, or a total of $115.6 million. A leading U.S. furniture manufacturer and one of the industry’s most trusted brands, Flexsteel likely has no interest in becoming just another name in the CSC-DirectBuy constellation, one that already includes Z Gallerie, One Kings Lane, Home Consignment Center, and, as a partner with Marquee Brands, Sur La Table.

Reading the clichéd, seemingly AI-generated comments from CSC Generation’s chairman, Justin Yoshimura, I decided to find out just who this buyout bully is and why he and his company are interested in crashing the Flexsteel party uninvited. At just under $21 per share, the offer struck me just as it struck many in the industry, as Home News Now’s Clint Engel noted in his breakdown, which is to say, low-ball. 

There is much to like about Yoshimura, who quit Palos Verdes High School near Torrance, California, to start up an online marketplace for second-hand cellphones (CellsWholesale.com). Years before that life-altering decision, one that he said upset his parents to no small degree, the future millionaire made more than a few bucks selling lemonade at 12 years old. 

Ah, the proverbial lemonade stand. But, in this case, it is literally true. This high school dropout-turned-tech titan literally began his career with mixing up lemonade.  

“I knew how to use Excel better than most people when I was 10 years old,” the serial entrepreneur told the Daily Breeze back in October 2014, when, at the ripe old age of 24, he steered another tech startup, 500Friends, a digital platform that sought to help retailers compete against Amazon with cloud-based customer loyalty programs. 

‘Could not be reached’

This was also back in the day when Yoshimura spoke to reporters as a living, breathing human being, long before practiced Wall Street euphemisms related via press releases became his preferred mode of communication. You see, much of the news coverage I turned up included a variation of “has not responded to requests for comment.”

The DNA of what would become CSC was in that lemonade business. What started as one lone lemonade stand soon became a chain of 25 lemonade dispensaries, an aggregate that generated thousands of dollars a month for the future Persian cat lover. At least, that is the narrative Yoshimura has articulated, both to the Daily Breeze and, two years earlier, to the The Wall Street Journal. 

In making the cash offer, Yoshimura said in a letter to Flexsteel’s board that CSC acquires “overlooked” store and catalog-based companies to re-make them into “digital first” brands. This statement, as bland and innocuous as it might seem, does accurately describe CSC’s mission. Well, that and reaching “$10 billion in revenues by helping retailers survive,” according to the venture capital firm’s boilerplate press release language. “Overlooked” translates to “trading below true value,” and “digital first” refers to CSC’s and its brands’ approach to consumers. 

Flexsteel is overlooked by this definition, and its posture toward e-commerce has been conservative. Importantly, as St. Louis retailer Mark Mueller noted in Engel’s analysis, Flexsteel has kept its distribution clean, helping to “protect dealers,” in Mueller’s description, from the websites undercutting on price with savings they gain from avoiding the costs of real-world stores.

In its Q4 earnings call the day before the CSC Generation offer was announced, Flexsteel COO Derek Schmidt notably identified expanding the company’s “presence” with leading e-commerce partners. Seeming to anticipate the offer, the Dubuque, Iowa-based manufacturer hints at what could become a response of, “thanks but no thanks.”

Re-thinking retail

To return to Yoshimura’s and CSC’s purposes, the through line in Yoshimura’s many startups, sales, and acquisitions is an interest in re-thinking retail and the kinds of relationships customers can have with their preferred stores and brands. 

Shortly after acquiring the Bon-Ton name and its related properties, including Elder-Beerman and Carson’s, in 2018, Yoshimura told the The Wall Street Journal’s Suzanne Kapner that it was time to re-think the purpose of brick-and-mortar stores, including and especially department stores. For a story about “the department store of the future,” Yoshimura uttered the heretical statement that he and his leadership team didn’t care about same-store sales and other “outdated measures” for benchmarking success. 

I’ve used this analogy before because I believe it to be apt: Disregarding same-store sales is akin to the move in major league baseball away from ERA, batting averages and even RBI as part of a shift toward much more meaningful analytics that include OPS, WHIP and WAR. What once seemed heretical now is widely acknowledged as smart baseball.

“We care about the store being a billboard for our digital business,” he told the Journal. “It’s a way for customers to experience our brand.”

It can be no coincidence, then, that listed on the CSC site as one of its many investors is Niraj Shah, co-founder and CEO of Wayfair, because the retail store-as-billboard game plan is one Wayfair is pursuing, as well, a game plan for which another CSC holding, Z Gallerie, is a model. 

CSC acquired Bon-Ton Stores after that regional department store chain filed for bankruptcy in 2019 and shuttered all of its stores. Snapping the Bon-Ton intellectual property up for less than $1 million, CSC then re-opened several stores to support the re-launch of several websites using Bon-Ton nameplates, including Younkers and Boston Store. 

This is one of the biggest paradigm shifts since, say, the early 2000s, when launching websites supported the stores. Now, the stores support the websites.

After acquiring Z Gallerie out of bankruptcy for the equivalent of just over $20 million, CSC kept only half of the retail chain’s 76 stores open, then over time shut down another ten. 

Leasing a Mac?

Before the acquisition of Bon-Ton, CSC used an infusion of $10 million in financing to pursue a retail strategy of allowing consumers to lease products rather than buy them, taking a cue from Netflix and what Yoshimura called “the subscription economy.” Speaking to the The Wall Street Journal’s Tomio Geron in 2017, Yoshimura said, “You can lease a car, but why not jewelry, apparel, a purse or a MacBook? It’s a much more consumer-friendly and environmentally friendly way of consuming products.”

Thus, Yoshimura and CSC should be marked as different from, say, Authentic Brands, which proudly trumpets the fact that, “We don’t make anything!” CSC brings value to the table, including a pattern of innovation and demonstrated expertise in marrying digital presences with dynamic product lineups. 

Marking Flexsteel as conspicuously different from CSC deals in the past, however, is the fact that Flexsteel is neither bankrupt nor “overlooked” as a brand at least within the industry, one that has always struggled with translating brand equity within and among the manufacturing community to brand awareness among consumers at retail. 

As Engel noted in his breakdown of the offer, publicly traded furniture companies are, generally speaking, relatively inexpensive, especially after the rolling challenges of pandemic, supply chain crises, inventory management, and whipsaw consumer demand trends. The lack of brand equity at retail is a big reason why companies like Flexsteel trade below their actual value. 

Flexsteel’s quarterly earnings report issued two weeks ago shows that the company is vulnerable to just the sorts of market value calculations that companies like CSC typically use to hunt for and lasso bargains. As Yoshimura put it in his letter of offer to Flexsteel, “transformation is needed,” because Flexsteel is being traded “at a substantial discount to its true value.”

But is a “successful outcome,” as the letter puts it, only possible if “executed as a private business with the additional resources of a digitally native owner like CSC?” as the letter baldly presents it? 

The Flexsteel-Sur La Table comparison

That CSC already is a substantial shareholder of Flexsteel means that Yoshimura has had a front row seat to witness Flexsteel’s impeccable reputation in the industry and its prominence as a front-line supplier to its retail partners, companies that in some cases have been selling Flexsteel product for more than 50 years. For the stores that carry it, Flexsteel isn’t an add-on or back-of-store afterthought. 

Also in the offer letter, Yoshimura compared Flexsteel with Sur La Table, saying both had “struggled to adapt to the online landscape,” relying instead on “offline sales in physical stores.” While mostly an apt comparison, the juxtaposition threatens to mask fundamental differences among these two very different businesses.

Sur La Table’s product lineup is ideal for online sales that ship right to the home. And Sur La Table has brand equity among consumers. I’ve purchased scant few kitchen items in my life and even I’ve heard of Sur La Table. (I even like saying it. So sophisticated.) 

As good a name within the industry as there is, Flexsteel isn’t a brand consumers pile in cars to go hunt down, cart home, and celebrate in their haul-themed TikToks. So, Yoshimura’s logic doesn’t hold up. But then it’s not likely meant to be parsed. Translation: “Trust us. We know what we’re doing. We’ve already done it.”

Clearly, Yoshimura and CSC do know what they’re doing. Yoshimura’s investment banker father taught him even as a kid how to trade options. 

The more things change . . .

Personally, I fear a repeat of what happened to Thomasville, Drexel Heritage, Henredon, and so many great intra-industry brands, which is the shilling of the name in distribution that historically none of these brands would be caught dead in, a parasitic feeding on brand equity built up over decades on the backs of mostly domestic furniture workers and craftspeople by marketing and branding companies such as Marquee Brands and the deeply ironically named Authentic Brands.

Maybe Flexsteel will follow the playbook of specialty women’s clothing retailer Christopher & Banks, which in late 2018 found itself the target of an unsolicited buyout offer from CSC Generation. Like Flexsteel, the company had just reported disappointing quarterly results. And like Flexsteel now, Christopher & Banks was at that time in the early stages of implementing a comprehensive turnaround strategy. After getting a second, sweeter offer from CSC, Christopher & Banks said, “Thanks, but no thanks,” according to the Minnesota Star-Tribune. 

The Plymouth-based retailer said the sweetened offer “did not reflect the full, long-term value of the company . . . and, therefore, was not in the best interests of the company and its stockholders.” The company’s board then “reaffirmed its commitment” to the strategic initiatives already then underway under its chief executive, Keri Jones, and her management team.

This all reads as very familiar.

Oh, also from that December 2018 Star-Tribune report: “Yoshimura did not respond to a request for comment.”