Craftmade International, Inc.

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Craftmade International, Inc.

650 South Royal Lane, Suite 100
Coppell, Texas 75019
U.S.A.
Telephone: (972) 393-3800
Toll Free: (800) 527-2578
Fax: (972) 304-3753
Web site: http://www.craftmade.com

Public Company
Incorporated: 1985
Employees: 131
Sales: $93.5 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: CRFT
NAIC: 42122 Home Furnishing Wholesalers

Craftmade International, Inc., based in Coppell, Texas, in the Dallas-Fort Worth area, designs, distributes, and markets ceiling fans and ceiling fan light kits as well as outdoor lighting and bathroom strip lighting and related accessories. Most of Craftmade’s products are made outside the United States to Craftmade’s specifications. Most are also designed for home use, thus the company markets its various lines through a nationwide network of over 1,600 lighting showrooms and electrical wholesalers who sell such fixtures in the new-home construction and remodeling trades. Craftmade markets over two dozen fan models, ranging in price from the costly to the inexpensive, plus almost 80 different light kits. It is Craftmade’s wholly-owned subsidiary, Trade Source International, Inc. (TSI), acquired in 1998, that designs, distributes, and markets the company’s bathroom strip lighting and outdoor lighting products, which are sold through mass merchandisers under the Accolade brand name. TSI also makes fan accessories. Craftmade’s merger with TSI more than doubled the company’s size between 1998 and 1999. In 1999, company founder and CEO James R. Ridings owned an 18 percent or $9.4 million stake in the company.

Ridings and Ivins Found Craftmade in the 1980s

James R. Ridings and James Ivins, two Texas salesmen, co-founded Craftmade International Inc. almost as a fluke. Ridings, a native of Waco, and a Baylor University dropout, had been working as a salesman for a company that sold plumbing supplies and ceiling fans to mobile home manufacturers, but in 1985 he decided to go into business for himself. He teamed up with Ivins, an independent sales representative for Litex Industries, a company that imported and marketed ceiling fans in the United States. Although Ridings and Ivins founded Craftmade as a distributor and marketer of furniture and hardware and plumbing supplies as well as ceiling fans, its chief startup business was the sale of Litex’s imported ceiling fans to mobile home makers. However, Litex soon discontinued its mobile home business to concentrate on sales to mass merchandisers like Wal-Mart, a strategy which in effect pulled the rug out from under Ridings and Ivins. They had developed a clientele of 30 mobile home manufacturers, but were left with nothing to sell them.

Their solution was to gather some capital together and go ahead on their own. After raising $30,000, they bought 800 ceiling fans from a Taiwan manufacturer and quickly sold out their stock. They then scrounged together another $45,000, primarily from the sale of property that Ridings owned in Waco, and replenished their supply of fans. They also developed a sales force, in part made up of former Litex representatives, and began moving fans in earnest. Within a year, they had a sales team of 15 and were selling 3,000 fans per month.

Initially, Craftmade was a low-flying operation. Partners Ridings and Ivins handled the company’s paper work in the living room of Ivins’ apartment in Dallas. Their warehouse and distribution center was a rented 9,000 square foot storage building, operated with a work force of three people. Still, in 1986, its first full year of operations, Craftmade had sales of $1.9 million, earning the new company $50,000. In an effort to increase their sales volume, Ridings and Ivins began selling their fans to lighting showroom companies and electrical wholesalers. They also started designing their own fans, pushing for a better quality product to sell in a higher-margin market. Their success also gave them some clout with their Taiwan manufacturer, whose products they carefully monitored for quality. On one occasion, after receiving complaints from one of their lighting showroom customers, Ivins flew to Taiwan and talked the manufacturer into switching its fan housings from aluminum to steel, thereby improving their screw retention capabilities and making them more reliable.

Initially, Craftmade contracted the manufacture of all of its products rather than make them itself. In 1986, the company entered an arrangement with Fanthing Electrical Corp. of Taichung, Taiwan. Under its terms, formalized in writing in 1989, Fanthing agreed to manufacture ceiling fans to Craftmade’s specifications. Later, Craftmade entered a similar agreement with Sunlit Industries, another Taiwan manufacturer. Sunlit made virtually all of Craftmade’s light kits for its fans. The outsourcing of its product manufacturing would continue to be a main part of Craftmade’s modus operandi; however, in 1990, through an acquisition, the company would also undertake the manufacture of some of its own products.

1990-99 Craftmade Goes Public, Diversifies, and Expands

In that year, Craftmade made two major moves. In February, it went public. Then, later in the year, in exchange for 150,000 shares of Craftmade stock, worth about $450,000, it acquired DMI Products, a struggling, Fort Worth, Texas-based specialty lamp manufacturer that, in 1989, had logged annual sales of about $3.8 million, as compared to Craftmade’s $13 million, and had a net worth of about $3 million. Combined, Craftmade and DMF’s 1990 sales closed in on $17 million and were expected to exceed $20 million in 1991. Under the terms of the agreement, Craftmade transferred 75,000 shares of its stock to DMI’s owners at the closing of the deal and agreed to transfer an additional 75,000 shares on the closing’s anniversary. As part of the agreement, DMF’s president, Edmond C. Wheeler, was to be retained for two years. An electrical engineer, Wheeler brought design skills to Craftmade, which hoped to create additional electronic products with his help.

In anticipation of the acquisition of DMI, Craftmade moved into a new 118,843 square-foot facility in Grand Prairie, taking the building so that it could put the combined operations under one roof. In addition to making specialty lighting, DMI, through its GEI division, made computer connections and cables. Altogether, with the DMI purchase, the workforce of Craftmade grew to about 50. Importantly, too, the acquisition diversified Craftmade’s product line, a necessary move because sales in the ceiling-fan industry had peaked and stabilized at unit sales levels under those reached in 1983, before Craftmade even entered the business.

During its expansion in the early 1990s, Craftmade earned a reputation as a solid business. Starting in 1992, it made Forbes magazine’s list of the “Top 200 Best Small Companies in America;” and it made the same list over the next two years. The company was, in fact, cruising in overdrive. By 1993, it was marketing its fans in all 50 states, with its biggest sales made in Ohio. At the end of its fiscal year, in June, the company had revenues of $22 million with net earnings of $1.1 million. Altogether, Craftmade had sold over 270,000 fans and 200,000 lamps. Sales would continue to climb the next year, when they reached $32 million and produced a net profit of $2.4 million.

Until 1995, when the company’s roster climbed over 100, Craftmade operated on leased property in Grand Prairie. The company also had two subsidiaries: Global Electronics Inc. (GEI), which manufactured computer cables and distributed telecommunications devices to wholesalers; and Durocraft Design Mfg., which made lamps and lighting accessories, primarily for The Bombay Company. In that year, its increased workforce and its need to move into a larger space prompted it to begin building a new 350,000 square foot facility in Coppell, Texas, on property located on the edge of the Foreign Trade Zone at the north end of the Dallas-Fort Worth International Airport.

During the 1990s, under the tutelage of Ridings, Craftmade earned an industry-wide reputation for taking good care of its customers. Its competitive strategy in its highly fragmented market was to offer fans comparable in quality to those of bigger sellers like Hunter and Casablanca at lower costs. As a result, Craftmade seldom had retailers back out of purchase agreements with the company. In order to keep that loyalty, Ridings allowed the company to take some financial hits rather than pass its rising costs onto its customers. For example, in 1996, when the value of Taiwan’s currency suddenly inflated, driving up its production costs, Craftmade absorbed losses rather than pass along a 10 percent rate hike to its clients, and, as a result, the company’s earnings did not grow that year. In contrast, in 1997, when the Asian economy went into a tailspin, Craftmade passed along an 8 percent savings to his showrooms.

Company Perspectives:

Craftmade products are sold exclusively through over 1500 lighting showroom dealers who are our partners in enabling American homes and businesses to enjoy the best ceiling fan values on the market today. These partners help guide purchasers to the products that will perfectly complement their decorative and functional needs. .. . Many factors have contributed to the success of Craftmade. But there was one component that we believe has been the determining one —the concerted effort put forth by our dedicated employees. Without them, regardless of the quality and versatility of the products we introduce, our success would have been much more difficult. With their support, we will continue to be a leader in the premium quality ceiling fan market.

In 1998, Craftmade acquired Trade Source International (TSI), a major purchase that would double the company’s revenues. It bought Trade Source, an outdoor lighting company, for $11 million in cash and stock. Like Craftmade, TSI basically designed and marketed its products but outsourced their manufacture. It sold lanterns and post lamps via major home center chains, including Home Depot and Lowe’s. Notably, in order to retain the loyalty of his mom-and-pop and small chain customers, Ridings decided against selling Craftmade’s better quality fans through these giant outlets. Instead, Craftmade opted to produce a private-brand line for them.

With the acquisition of TSI, Craftmade developed a cross-selling strategy. TSF’s customer base consisted largely of home centers and mass merchandisers, while Craftmade’s was at least in part made up of independent retailers. Over the next couple of years, Craftmade introduced its established customer base to Trade Source products and began marketing its traditional products through mass merchandising outlets. By 1999, Craftmade was doing business with major home-center chains and some 1,600 mom-and-pop stores across the United States.

That year, it also entered into a partnership agreement with Dolan Design, Inc., lighting designer Patrick Dolan’s Portland, Oregon-based firm. Dolan had already designed some of Craftmade’s most popular, best selling fans, and under the new arrangement he was to undertake the design of other Craftmade products, including chandeliers, wall pendants, and lighting accessories.

Craftmade’s sales jumped from $40.9 million in 1998 to $85 million in 1999, driven in part by the company’s acquisitions and the success of its Accolade brand lighting fixtures. The impact of Craftmade’s diversification and cross-selling use of its new marketing channels can be seen in the fact that in 1999 ceiling fans only accounted for 32 percent of the company’s sales, whereas the year before they had accounted for 68 percent. The huge increase in sales in 1999 was like a shot of financial adrenaline, and while it was in progress it gained Craftmade an important accolade—a 49th ranking on Forbes magazine’s annual list of the 200 Best Small Companies. It was also featured in that publication’s special edition “12 Companies to Watch” section.

2000 and Beyond: New Sales Strategies

The next year, though, Craftmade’s sales leveled off at their new plateau, growing by just $500,000 to $85.5 million. Moreover, the company’s net income fell, from $5.7 million to $4.3 million. That slight decline in the company’s profit margin was the result of discontinued pricing and promotional programs used to bolster sales in the company’s showroom division. In any case, prospects for a significant growth in sales in 2001 looked good. The company recorded a 12 percent increase in its fiscal 2001 first quarter sales over sales from the same period in 2000. Craftmade also expected greater revenue growth from the rollout of a new mix-and-match lamp sales campaign and display developed for Lowe’s.