Here comes the newRestoration Hardware (
Now that follow-on offerings to let private-equity investors
take profits in the wake of November's initial public offering
are over, and creative talent Gary Friedman is back at the helm,
the firm can focus more sharply on business at hand.
It plans to transform itself from a high-end brand in home
furnishings to a luxury lifestyle brand under the product-neutral
RH logo (think RL, forRalph Lauren (
Not only is the company branching into "curated" collections
of contemporary art, antiques and kitchenware, it also plans to
launch RH Atelier, a luxury brand of apparel, accessories,
footwear and jewelry.
"We are in the very early stages of a retail renaissance and
believe we can curate a world and a business that goes far beyond
the four walls of the home," Friedman said in the firm's mid-June
It's already been growing the top line in double digits for 13
straight quarters as Friedman and co-CEO Carlos Alberini added
new lines in furniture, textiles and lighting.
In the first quarter ended May 4, revenue rose 38% vs. a year
earlier to $301 million. Same-store sales jumped 41%, an almost
unheard of gain in retailing.
"Those are staggering numbers," said Wells Fargo analyst Matt
Nemer. "There's no question this is a high-growth company."
Shares have climbed 119% since the November IPO.
"The market is desperate for growth stocks in a backdrop of
subpar growth," said Dan Veru, chief investment officer with
Palisade Capital Management, which owns shares in the
Key to Restoration Hardware's ongoing transformation will be
the opening of much larger Design Galleries stores to better
showcase all of its products.
Products have been "trapped in legacy real estate that was
designed for an entirely different company," said Alberini in the
The jury is still out whether the company can make a go of all
of its ambitious undertakings.
Many of the new lines put Restoration Hardware in "uncharted
waters," Nemer says.
"These are unproven businesses, particularly art and
antiquities," he said. "I don't really know of a significant
retailer of scale that has really tackled these markets."
But if anyone can do it, it's Friedman: "He's a brilliant
merchant," Nemer said.
In early July, Friedman was reappointed to his prior positions
as chairman and co-CEO. He resigned ahead of the November IPO
after an internal inquiry investigated his relationship with a
female employee. But he continued to work as "creator" and
Friedman joined Restoration Hardware in 2001
), where he was president and chief operating officer. He's
credited with saving Restoration Hardware from bankruptcy.
While the firm was struggling during the recent recession,
Friedman took it private in a 2008 leveraged buyout. Many
underperforming stores were closed.
Although revenue growth has been strong of late, earnings are
another story. The company lost money from 2008 to 2011. Costs
have continued to rise and some of the earnings gains since last
year have excluded compensation, IPO and other expenses.
Still, earnings are improving. First-quarter adjusted net
income increased to $2.3 million from a net loss of $1.3 million
a year earlier, or 6 cents a share vs. a loss of 4 cents.
Non-adjusted, the company lost about $200,000 in the quarter
vs. a net loss of $3.7 million a year ago.
Restoration Hardware's margins are lower than the double-digit
EBIT margins typically posted by other furnishings' companies,
Nemer said. But investors are "excited" about the potential to
grow into higher margins.
"We're bullish on their ability to be significantly
profitable," he said. Other analysts are similarly upbeat. They
see adjusted earnings rising 46% this fiscal year to $1.46 a
share and rising 26% the next year, says a Thomson Reuters
One strong point, Nemer says, is the company's positioning.
It's above mass-market players such as Crate & Barrel and
Williams-Sonoma's Pottery Barn, but below top-end designer
showrooms used by decorators.
"There is a lot of white space between those two groups," he
said. "There are not a lot of companies directly aligned with
While the company has a "differentiated" product, it's also
benefiting from the home-renovation upswing "that has swept
upHome Depot (
),Pier 1 (PIR) and others," Veru says.
Restoration Hardware's sofas, chairs, tables, bureaus and
other products are largely modern updates of classical designs.
Its target market: households with incomes above $200,000 or
"aspirational" customers trading up from department stores and
While products are available in ever larger and multiple
catalogs and on the firm's website, less than 20% of the
assortment is displayed in retail stores because of space
"The crux of the story is to set the products free," said
Nemer. "They're trapped in the catalog and the website. People
don't want to spend $3,000 on something without seeing it in
Products that move from just the catalog and website into
retail stores get a 50% to 150% lift in sales, management
Five full-line Design Galleries have opened since 2011 in Los
Angeles, Houston, Scottsdale, Ariz., and most recently Boston and
With an average of 21,600 square feet of selling space, they
are about three times the size of the company's legacy stores,
not to mention more productive.
The Boston outlet is the largest at 40,000 square feet.
Besides displaying new product categories such as tabletop goods
and "objects of curiosity," the four-story historic building
features a wine bar, beer pub, billiard lounge, library, club
rooms and conservatory.
"It's almost like the modern reincarnation of the department
store, but almost everything in the store is its own brand,"
The rollout of RH Kitchen and Tableware next year will likely
feature other brands by necessity, he says.
Leading the merchandising effort is recently hired Richard
Harvey, former president of the Williams-Sonoma brand.
Two more Design Gallery stores are set to open next year in
Greenwich, Conn. and Atlanta. Lease talks are underway in 30
other markets, including New York, Chicago and Miami.
The biggest number of openings aren't slated until 2015 and
In a recent filing, Restoration Hardware said it has the
opportunity to more than quadruple its current selling space in
the U.S. and Canada over the next five to seven years.
International expansion is also on the table.