Art Van began its final sale Friday.

The Warren-based retailer’s sudden announcement that it would wind down operations comes only three years after its late founder, Art Van Elslander, sold the company to a Boston-based private equity firm, Thomas H. Lee Partners LP, in an estimated $550 million deal.

How did a seemingly healthy, valuable and beloved company go so wrong so fast?

After its 2017 acquisition, Thomas H. Lee set an aggressive strategy to open 200 more stores and double revenue to $2 billion by 2020.

But being saddled with roughly $400 million in debt and no financial cushion to respond to the disruption of changing furniture habits left Art Van’s business model sitting on a tinderbox. Management missteps were all the fuel needed to burn the house down.

The story of Art Van’s demise is full of finger-pointing and finger-wagging from consumers and experts blaming bad management from financial acquirers, and consumers’ growing penchant for online retail.

They’re all true.

Private equity and hedge funds have a rough history in the retail sector, despite a growing presence across all industries.

Companies owned by private equity firms accounted for 8.8 million jobs in the U.S. in 2018, according to a Feb. 1 New York Times story on the demise of Payless ShoeSource under Alden Capital Partners.

However, 10 of the 14 largest retail bankruptcies since 2012 have been owned by private equity, including Toys R Us and RadioShack.

Thomas H. Lee entered the business with no previous experience in the furniture retail market. But it’s not a retail virgin, as the private equity firm manages a $22 billion portfolio that includes 1-800 Contacts, Bargain Hunt Superstores, Dunkin’ Brands, Fogo de Chao and Party City.

Diana Sikes, senior vice president of marketing at Art Van from 2010 until August 2018, said Thomas H. Lee wasn’t brought in to rescue a struggling retailer, but to modernize its IT infrastructure and build its online presence. However, all it brought was a misunderstanding of retail and inept executives.

“(Thomas H. Lee) had blind spots,” Sikes said. “They had a complete disregard for Warren, Michigan, and its ability to attract top talent. They were of the belief that if you weren’t Ivy League talent and vetted by Boston Consulting Group or KPMG, you couldn’t possibly be capable of growing a company.”

The company was profitable when Thomas H. Lee entered, but its cost-cutting strategy quickly dismantled its balance sheet, said a former executive who spoke to Crain’s on the condition of anonymity due to a nondisclosure agreement.

“The first thing (Thomas H. Lee) did was start cutting costs and cutting people,” the executive said. “When everyone starts looking back and analyzing this, how it happened, they are going to see they took a successful brand with a successful executive team and destroyed a great company in three years by bringing in the same team that ran the demise of Kmart and Sears.”

Longtime CEO Kim Yost retired from the company in February 2018, less than a year after Thomas H. Lee acquired the company and only days after Van Elslander died.

Yost was replaced in April 2018 by Ronald Boire, a former Barnes & Noble Inc. CEO and executive at Toys R Us, Brookstone, Kmart and Sears. Yahoo! Finance ranked Boire as the worst executive of 2016 after Barnes & Noble reported a $24.6 million loss that year.

The executive said Thomas H. Lee terminated or accepted the resignation of upward of 22 Art Van executives in the first two years of its ownership.

“(Thomas H. Lee) did not put passionate leaders in seats,” Sikes said. “They replaced people working crazy hours and with passion with a team of numbers crunchers who would fly in on Monday and fly out on Thursday night. That might work in manufacturing, but not in retail.”

Boire left the company 14 months later in July. Gary Fazio took over the top executive role in September. Fazio had retired in 2015 as the CEO of the Serta-Simmons Bedding Co., the world largest bedding manufacturer and supplier to Art Van. Gail Galea, Art Van’s executive vice president and chief merchandising officer, also departed last year.

To fund the transaction, Thomas H. Lee loaded up Art Van with debt — a common private equity tactic to reduce the firm’s financial exposure. Art Van carries $178 million in debt with FS KKR Capital Corp., the publicly traded business development and lending arm of New York private equity firm KKR & Co. Inc.

KKR declined to comment.

Crain’s was unable to independently verify the rest of Art Van’s debt, but sources said the company owed $60 million to Wells Fargo & Co. with an additional roughly $180 million in unsecured debt. Wells Fargo did not respond to inquiries.

The bent of private equity often is to extract as much cash as possible, as quickly as possible from a company, said Pat O’Keefe, CEO of Bloomfield Hills-based advisory form O’Keefe & Associates Consulting.

At closing in 2017, Thomas H. Lee entered into a series of sale-leaseback deals on Art Van’s real estate, including its 1.06 million-square-foot headquarters in Warren and 20 locations in Michigan, with a variety of buyers after closing the deal to buy Art Van.

“Private equity saw value outside the business in the real estate owned by Art Van, who owned a number of their stores,” O’Keefe said. “They entered into a massive sale-leaseback to liquidate the value of the real estate and recover a big part of their initial investment.”

The executive said the move constrained cash flow as the retailer became bogged down by high rents.

Thomas H. Lee then made the bolt-on acquisitions of Levin Furniture in Pittsburgh and Wolf Furniture Co. in Altoona, Pa., in separate deals Crain’s estimated at a total of $260 million.

The acquisitions boosted Art Van’s workforce by 1,900 to 5,500 employees and added 53 stores. Art Van reported to Crain’s revenue of $850 million in 2018, up from $650 million in 2015.

O’Keefe said the bolt-on formula that was popularized in manufacturing routinely fails under finance-driven private equity ownership.

“This is almost always a disaster, as the PE firm rarely executes on the plan post closing as they don’t devote resources to the synergies they are hoping to get from centralized purchasing, human resources and other administrative duties,” O’Keefe said.

“They often don’t plow money into the business and the companies now under a sea of debt often don’t make it, especially if there is a small hiccup in the numbers.”

Thomas H. Lee told Crain’s in an emailed statement that “investors in the March 2017 acquisition, including THL, will lose 100 percent of their principal investment in the company and never received any dividends or returns of capital from their investments.”

Online companies such as Wayfair in furniture and Casper, Leesa and Tuft & Needle in bedding have gobbled up market share away from legacy traditional retailers like Art Van and competitor Gardner White. Online retail giant Amazon is also cutting into its bottom line.

The 25 largest furniture and bedding retailers in the U.S. combined for a 7.5 percent increase in sales to $45.7 billion in 2018, according to a report in Furniture World. However, it was Amazon and Wayfair that dominated those increases. The pair combined for an estimated 35.8 percent increase in estimated furniture and bedding sales in 2018.

Nearly 20 percent of all U.S. furniture sales are now online, according to IBISWorld data. Traditional brick-and-mortar outlets continue to lose market share even as total sales increase, with the exception of manufacturer-branded companies such as Monroe-based La-Z-Boy Furniture, according to Furniture Today.

“Despite our best efforts to remain open, the Company’s brands and operating performance have been hit hard by a challenging retail environment,” Diane Charles, Art Van Furniture’s vice president of communications, said in a statement upon announcing the liquidation.

But all the evidence of decline didn’t stop retailers from expanding, In 2018, there were more mattress stores in the U.S. than McDonald’s, USA Today reported. The number of mattress stores in the U.S. increased by 32 percent between 2009 and 2017 to 15,255, according to IBISWorld.

An Art Van competitor, Houston-based Mattress Firm Holdings, entered Chapter 11 bankruptcy after an acquisition binge that grew its footprint to 3,230 storefronts and 10,000 employees. The mattress retailer ballooned revenue to $3.4 billion in 2018 from just $432.3 million in 2009, but was bleeding money for years. It reported a $54 million net loss in 2018.

Upon exiting bankruptcy in November 2018, Mattress Firm closed as many as 900 underperforming stores.

The executive said Art Van’s move to mattress stores was likely unwise, as it reduced foot traffic at its furniture stores.

“Bedding is a major driver of furniture sales,” the executive said. “When you put them out separately, you have those additional (real estate and marketing) costs and one product line to make up all the money. That didn’t work.”

Art Van attempted in recent years to upscale its product line, under the belief that the store had more opportunity to compete with home furnishing retailers Pottery Barn and Ethan Allen Interiors, said retail and urban planning expert Robert Gibbs, CEO of Birmingham-based retail advisory firm Gibbs Planning Group.

“Art Van never got over the image of being the low-cost option, or the middle-class’ furniture store,” Gibbs said. “They believed the newer, higher quality merchandise and price points would reflect differently on the brand. At the same time, Pottery Barn and Ethan Allen reduced their prices and offered many more promotions. Art Van never caught up. They were having a once-in-a-lifetime sale every weekend.”

Sikes disagrees that Art Van’s PureSleep stores or upscaling had anything to do with its demise.

“(Thomas H. Lee) is promulgating this idea that the challenging retail environment did this. No way,” Sikes said. “Mr. Van built up a strong company where people in their first apartment with a $500 budget would be well served and people building their dream home with a $50,000 budget could be served. All of this is such a minuscule piece of the pie. Did millennials kill Art Van? No. Did a shift in product kill Art Van? No. We were in a wonderful spot when they came in.”

Thomas H. Lee also slashed the company’s marketing budget, making it even more difficult to communicate its new quality and stores, the executive said.

“If you watch TV in Michigan, you couldn’t miss an Art Van ad,” the executive said. “It was in your face every day. But when they cut that back, we struggled to get people in the door.”

Conway said cutting the advertising spend was the death knell for the company.

“Art Van is a huge marketing play. Art was a marketing genius and that’s what grew the company,” Conway said.

Another compounding factor was the ongoing trade war between the U.S. and China.

China was the top furniture exporter to the U.S. in 2018, sending $34 billion in tables, chairs, couches and other home furnishings to our shores. Those imports were hit with a 10 percent tariff in September 2018, but then jumped to 25 percent in May 2018 after the U.S. and China trade talks stalled.

The tariffs would add $4.6 billion a year to what consumers will spend on imported furniture such as recliners, couches and upholstered living-room items, according to a June study from the National Retail Federation.

Alex Calderone, managing director of Birmingham-based Calderone Advisory Group, said the tariffs have lowered margins significantly for major furnishing retailers.

“Some of the furniture retailers our firm has come across simply couldn’t pass these costs on to consumers,” Calderone said.

Despite announcing liquidation last week, a Chapter 11 bankruptcy filing was expected as early as March 6 or early this week.

Hilco Global and Gordon Brothers have been retained to assist Art Van in liquidating, the company told employees in a memo sent last week and obtained by Crain’s. The liquidators would sell all of Art Van’s remaining inventory, including office equipment and wall fixtures, and any other assets to repay creditors.

Art Van’s approximately 44 Levin Furniture and Wolf Furniture stores, which the company acquired in 2017, will be sold back to former owner Robert Levin, pending court approval, the company said in a news release. Eight of those stores, however, will be liquidated.

There are another 146 Art Van stores remaining. An unknown portion of those stores are franchised and will not be liquidated.

Approximately 3,100 employees, including 262 at its headquarters in Warren, are scheduled to lose their jobs as the company winds down, with all stores expected to be closed by May 31.

The Van Elslander family, led by Gary Van Elslander, was in discussions to buy back the company in a stalking-horse bid under the Chapter 11 reorganization, but a deal never materialized.

On whether the family could return to the table, Conway said it’s unlikely.

“I don’t see the family coming back in,” Conway said. “Art has about 40 grandchildren. I don’t see Gary wanting to get in the middle of that mess.”

A buyer could yet emerge to salvage parts of the company and the valuable name.

“Art Van is really one of the best-known furniture stores in the country,” Gibbs said. “It’s highly respected. I’d hate to see it just go away.”