Since its humble beginnings in a North Hollywood garage, Harbor Freight Tools USA Inc. has grown into a $2 billion player in the discount home improvement market by selling store-brand tools advertised at “ridiculously low prices” – sometimes at less than one-tenth of the cost of name-brand counterparts.
But the Calabasas retailer is facing a new threat from an unlikely competitor. Lumber Liquidators Inc., the country’s largest retailer of hardwood flooring, has poached several high-level Harbor Freight employees in the last year. And the hardwood company is now making its own move into the tool business, having begun in recent months to sell discount tools at some of its retail stores and on its website.
The poaching has hit Harbor Freight in an area key to its success – sourcing. The company contracts directly with manufacturers in China who make store-brand versions of much more expensive tools. Several of the employees it’s lost were central to those efforts, including Carl Daniels, former senior vice president of supply chain, and William Schlegel, who became Lumber Liquidators’ chief merchandising officer in March of last year.
“If you’re going to get into a new category, wouldn’t you want to go to the people who know what it’s all about?” said Lou Knappenberger, a home improvement product wholesaler and consultant in Yorba Linda. “I don’t see a lot of competition in Harbor Freight’s niche.”
Harbor Freight has hit back, launching a legal fight against the Toano, Va., lumber company for allegedly stealing trade secrets. The fight is happening at a critical time – while opportunity for growth in the home improvement market has begun to bounce back from the real estate crash.
Rick Nelson, an analyst at Stephens Inc. in Chicago, said that the home improvement retail sector has picked back up, after several years in which industry stalwarts Home Depot Inc. and Lowe’s Companies Inc. saw declining shares and revenues.
“It got pushed down the rankings of where consumers want to spend money, but the housing market is beginning to stabilize,” he said.
Information game
Harbor Freight’s discount niche has been especially lucrative. In an April credit report, Moody’s estimated the privately held company’s revenue at $2 billion last year, up from about $1.5 billion in 2010.
That’s noteworthy for a company that started as a mail-order outfit in 1977 out of founder Allan Smidt’s garage in North Hollywood, initially selling industrial supplies before moving into tools and equipment and opening retail stores. He handed the reins of the company to his son, Eric Smidt, in 1999.
Since then, the company has pursued an aggressive growth strategy. Company executives had plans in October 2009 to double sales in four years and triple them in six, as revealed in an unrelated lawsuit against the company filed by a former employee last year. Harbor Freight also moved its corporate headquarters from Camarillo to a 90,000-square foot space in Calabasas in 2010 to accommodate further expansion. Today, it has some 8,000 employees and nearly 400 retail centers nationwide, including seven in Los Angeles County.
Key to Harbor Freight’s success have been its overseas sourcing and its ability to track consumer demand, which allow it to produce a wide range of store-brand versions of popular tools cheaply. The company sells everything from power tools to generators to truck winches for home improvement and professional purposes alike.
The company jealously guards its sourcing and product information, restricting access to computer files and requiring employees to sign several confidentiality agreements, according to its lawsuit against Lumber Liquidators.
But last year, the hardwood company began moving in. Harbor Freight has stated in its lawsuit that in addition to Schlegel and Daniels, the company lost Michael Holcomb, global sourcing manager; Jay Quickel, senior product category manager; and David Chau, China sourcing general manager. The lawsuit further alleges that Holcomb, Daniels and Quickel deleted e-mails before they left, that they took trade secrets with them, and that Lumber Liquidators has begun contacting Harbor Freight’s manufacturers for pricing and availability.
“Although it has publicly disavowed plans to diversify its product offerings beyond flooring, LLI has been quietly but aggressively executing a plan for a broad expansion into the tool market by soliciting Harbor Freight employees,” Harbor Freight’s lawsuit stated.
Lumber Liquidators first began showing more interest in the tool business about a year ago. Wholesaler Knappenberger said he gave a presentation offering to supply tools to the company last year. The company didn’t follow up, but wouldn’t have taken such a meeting a couple years ago, he believes.
And within the last few months, Lumber Liquidators has begun to sell tools, introducing them in a few stores in the first quarter before rolling them out on its website and to more stores recently. It has five outlets in the L.A. area.
Most of the tools have been related to flooring. For example, Lumber Liquidators now sells an oscillating multitool, used to sand and cut floors and other surfaces, for $29.99. Harbor Freight has long sold a popular store-brand multitool for between $25 and $60, a cheaper alternative to a model made by Stuttgart, Germany, company Fein that retails for more than $300.
Close to the vest
Harbor Freight claims that Lumber Liquidators’ moves could jeopardize its product availability, low pricing and manufacturing time. But it’s unclear yet just how much Lumber Liquidators plans to expand into the tool business.
The company has played its strategy close to the vest, not mentioning tools in recent earnings calls, or in recent quarterly and annual reports. A Lumber Liquidators spokeswoman declined to comment, citing pending litigation. A Harbor Freights spokesman also declined to comment.
In introducing former Harbor Freight employee Daniels during an earnings call last year, Lumber Liquidators Chief Operating Officer Robert Lynch said only that “Carl will work closely with Bill Schlegel, our chief merchant, and the team in China to further develop efficient international solutions to our product allocation needs.”
Some analysts believe Lumber Liquidators is only planning a limited product expansion into tools related to flooring, but Knappenberger speculated that the company might be looking at more than just a few tools on the side.
“It’s possible they’re looking at a new venture, if you’re taking that many people from a specific source,” he said.
What’s more, there’s a bigger pie to compete over as the industry rebounds from the downturn. After taking big hits in 2008 and 2009, home improvement retailers such as Home Depot and Lowe’s have posted revenue increases and stock gains each of the last two years. Home Depot shares are up around 40 percent in the last year, during which its revenue climbed back above $70 billion for the first time since 2008.
“You’ve seen a nice rebound after pretty sluggish sales from the last couple years,” said Peter Keith, an analyst at Piper Jaffray & Co. in New York. “I think homes have been underinvested in for a number of years and people are starting to feel better about the job market and the economy.”
The fight between Harbor Freight and Lumber Liquidators is still in its early stages. Lumber Liquidators has yet to respond to the lawsuit in Los Angeles Superior Court.
Harbor Freight could seek an injunction barring the other company from using its proprietary information, said Keith Gregory, an attorney at Snell & Wilmer LLP’s downtown L.A. office. Such cases are also often settled out of court for a one-time payment or an agreement to pay royalties.
Legal fights over trade secrets, he added, are not uncommon when high-level employees switch companies.
“Potential plaintiffs are becoming much more sensitive to it to try to nip it in the bud, having confidential agreements and taking all the steps that are necessary,” he said.
