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Restoration Hardware Transitions To Lifestyle Brand

By: Investor's Business Daily
Posted: 8/13/2013 4:55:00 PM
Referenced Stocks: HD;LOW;RH;RL;WSM

Here comes the newRestoration Hardware ( RH ).

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 ( RL ).

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 conference call.

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.

Revenue Growth

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 company.

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 conference call.

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 "curator."

Friedman joined Restoration Hardware in 2001 fromWilliams-Sonoma ( WSM ), 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 poll.

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 them."

While the company has a "differentiated" product, it's also benefiting from the home-renovation upswing "that has swept upHome Depot ( HD ),Lowe's ( LOW ),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 other retailers.

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 constraints.

"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 person."

Products that move from just the catalog and website into retail stores get a 50% to 150% lift in sales, management says.

Designer Galleries

Five full-line Design Galleries have opened since 2011 in Los Angeles, Houston, Scottsdale, Ariz., and most recently Boston and Indianapolis.

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," Nemer said.

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 beyond.

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.