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Focus on upscale direct sales was costly for Home Interiors & Gifts(Dallas Morning News, The (KRT) Via Acquire Media NewsEdge) May 2--In 1957, Mary Crowley founded Home Interiors & Gifts Inc. and she and her son Don Carter went on to build it into a local landmark by selling candles, artificial flowers and framed artwork to people on limited budgets. Then came a 1998 buyout that was supposed to take the $500 million home accessories company to new heights. The acquisition led to 10 years of control by some of the biggest names in Dallas finance: buyout firm Hicks, Muse, Tate & Furst Inc., and, later, a marquee investment manager called Highland Capital Management LP. The money men arrived with plans to ramp up sales and lure customers with more upscale tastes. Instead, their stewardship coincided with a long slide, which culminated in Home Interiors' Chapter 11 bankruptcy filing on Tuesday. "My question is, how can something so good turn to something so bad in such a short period of time?" said Don Searcy, who took a job sweeping floors and cleaning bathrooms at Home Interiors in 1960, then rose to become its vice president and general manager before retiring in 2000. Home Interiors' downfall was partly due to rising competition from the likes of Wal-Mart Stores Inc. and Target Corp. But the company also stumbled because it lost touch with the homespun approach and the customers that once made it work, according to former executives, sales veterans and Dick Lindenmuth, the outside turnaround artist hired in February to spearhead a restructuring. "They brought in new leadership that thought they could change and head in a new direction, and maybe lost touch with the foundation of the business," said Mr. Lindenmuth, explaining how Home Interiors ended up in bankruptcy court. "Somehow, over the years, we got up to higher-priced products." Based in a sprawling headquarters and distribution center in Carrollton, Home Interiors employs about 500 people, half the workforce it had two years ago. Its creditors include small North Texas businesses such as the Dallas photo studio owned by Randy and Jeri Masoner, owed $145,000, which has had to cut two of its 20 employees because of the lost business. Also at stake are the livelihoods of some 70,000 independent "decorating consultants," most of them women, who peddle the company's wares using Tupperware-style home parties and other "direct selling" techniques in the United States and Puerto Rico. The company's Canadian and Mexican affiliates, with another 30,000 consultants, were not part of the bankruptcy filing. Akin to Mary Kay Home Interiors' direct-sales model is similar to the way Addison-based cosmetics giant Mary Kay Inc. works, and the likeness is no coincidence. Mrs. Crowley and Mary Kay Ash worked closely together at direct-sales companies before launching their own ventures -- Mrs. Crowley in 1957, followed by Mrs. Ash in 1963. Back then, Home Interiors looked nothing like a juicy buyout target. Mrs. Crowley brought a religious approach to her business, with a corporate philosophy of honoring God, and blessing and serving others. "In the beginning, it was very meager profits," Mr. Searcy said. "She told the board, 'I know we don't have much, but what we have, we're going to share.' Everybody got a bonus." Over the years, Home Interiors prospered, and Mrs. Crowley and her son Mr. Carter became business and philanthropic leaders. She donated to First Baptist Church, and funded medical research and homes for troubled youths. He started the Dallas Mavericks. Mr. Carter did not respond to requests for comment for this story. Mrs. Crowley died in 1986. 'Poised' for growth By the 1990s, Home Interiors was bringing in about $500 million a year in revenue. It was also attracting suitors such as Hicks, Muse, Tate & Furst, the Dallas buyout firm then headed by Tom Hicks, whose deals that decade included acquiring the Dallas Stars and the Texas Rangers. (Hicks, Muse is now called HM Capital Partners LLC, and Mr. Hicks is no longer affiliated with it. He declined to comment for this article.) A Hicks, Muse offer to buy Home Interiors fizzled in 1994 when Mr. Carter decided his late mother would not have approved of the deal. He was worried that the buyout firm viewed the company as "numbers and machines ... not people," he told The Dallas Morning News a few years later. But Hicks, Muse got another chance after Mr. Carter concluded that the firm understood his company's culture. In 1998, the firm agreed to pay some $920 million in a leveraged buyout for about two-thirds of Home Interiors' stock, with the Carter family and others retaining a minority stake. While lacking the glamour of Mary Kay, Home Interiors had lots of cash flow, and it was "poised for exceptional growth and profitability," Hicks, Muse managing partner Jack Furst said at the time. The IPO craze of the late '90s was booming, and there was talk of taking the company public in an initial public offering within a few years. The new owners began to revamp product lines to appeal to younger, more upscale consumers, introducing more products priced over $100. The approach fell flat with many of the contractors who sold the company's goods to consumers, said Barbara Hammond, a longtime friend of Mrs. Crowley's who served as president of Home Interiors between 1995 and 2000 and as a board member from 2000 to early 2006. "I would visit with clients and they would say, 'What is Home Interiors doing? Have you been sold? Why are you changing your line?'" she said. Joe Colonnetta, a Hicks, Muse partner who served as chairman of Home Interiors, declined to comment. Numbers fall Still, in at least one important way, Hicks, Muse's strategy seemed to work. Sales rose to a $615.5 million peak in 2003, up more than 33 percent from the $460.4 million in 2000, according to filings with the U.S. Securities and Exchange Commission. But profits before debt payments and taxes never got back to their level of 1997, the year before the buyout. Looking at the bottom line, net profit amounted to just $32.4 million in 2003 -- a bit more than half the $62 million from 1997. The company swung to a net loss of almost $4 million in 2004, and bled more than $4 million in the first nine months of 2005, the last time it disclosed results publicly. One reason for falling profits: rising debt payments. Borrowed money accounted for more than half the sum paid by Hicks, Muse, and the buyout left Home Interiors with $500 million in debt. The company paid $240,000 a year in interest expense between 1994 and 1997, compared with the more than $35 million a year it owed between 1998 and 2004, after taking on the buyout-generated debt. Dealing with debt Highland Capital gained control of Home Interiors in a debt-restructuring deal in early 2006. The investment firm brought in its own chief executive, Dick Heath, who talked of doubling sales -- pushing them up to $1 billion -- in five years. With his wife, Jinger, Mr. Heath had already founded a direct seller of cosmetics called BeautiControl Inc., which was acquired by Tupperware Brands Corp. for $60 million in 2000. Under Mr. Heath, Home Interiors' upscale shift continued, with pricier products and a glossy new 180-page catalog, said Aida Beretta, a former Home Interiors national sales director who helped build the company's business in Mexico and Puerto Rico. But she, too, said the approach didn't click with many customers. "My market has always been the lower-income class and it was killed because the product went too high, too sophisticated," she said. "People could not buy it anymore." This year, Ms. Beretta started Cuadros y Cosas, or "Pictures and Things," a Home Interiors competitor with operations in Santa Fe Springs, Calif., and San Antonio. She is involved in a lawsuit with Home Interiors, which accuses her of violating a noncompete clause in her contract. Mr. Heath, who stepped down in February, said he put his "heart and soul" into Home Interiors. He declined to say more, citing a confidentiality agreement he signed with the company and Highland. Last year, according to its bankruptcy filing, Home Interiors posted revenue of about $300 million. Timeline 1957 Mary Crowley founds Home Interiors & Gifts Inc. in Dallas. (It later moves to Carrollton.) She and her son, Don Carter, set about building the business, which sells decorative items through a network of independent "decorating consultants" in the U.S., Canada, Mexico and Puerto Rico. 1986 Mary Crowley dies. 1998 Buyout firm Hicks, Muse, Tate & Furst Inc. agrees to pay $920 million for control of Home Interiors. The year before, the company had nearly $469 million in sales and a profit of $62.2 million. 2006 Highland Capital Management LP takes control after acquiring Home Interiors' debt. 2008 Home Interiors files for bankruptcy, launches restructuring and lays off scores of people. SOURCE: Dallas Morning News research To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com. 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