Avoid This Retail IPO

Restoration Hardware is back from the grave, but that doesn't mean that you have to warm up to this zombie.

The upscale, home-furnishings retailer filed to go public this morning, hoping to cash in on the recent success of chains targeting well-to-do mall shoppers including Teavana (NYSE: TEA  ) and lululemon athletica (Nasdaq: LULU  ) . The fact that Pier 1 Imports (NYSE: PIR  ) has become a 100-bagger in its public absence also isn't hurting.

For those not familiar with the publicly traded life of Restoration Hardware, it dismissed buyout overtures from Sears (Nasdaq: SHLD  ) before going private three years ago.

The chain's been bouncing back in recent quarters, but it's still too soon to believe that Restoration Hardware will fare any better as a public company now than it did a few years ago. For starters, Restoration Hardware has posted four consecutive fiscal years of losses. The deficit narrowed substantially last year -- and the retailer is profitable through the first two quarters of fiscal 2011 -- but couldn't Restoration Hardware have given us a full year of positive earnings before hitting the market again?

Comparable stores rose 19% last year -- and spiked 20% through the first half of this fiscal year -- but that is largely offset by declines in comps of 10%, roughly 9%, and 7% in the three previous years.

Restoration Hardware has thrived with its direct retail over the years, but it should be pointed out that there were just 87 locations open this summer. There had been 100 stores out there when the retailer was taken private by management-led Catterton Partners.

Restoration Hardware will be hoping that investors forget about its past and focus on its most recent performance metrics. Underwriters will probably point to the success of Pier 1, having gone from $0.10 a share in March 2009 to trade in the double digits today. Shares of Williams-Sonoma (NYSE: WSM  ) , Bed Bath & Beyond (Nasdaq: BBBY  ) , and Cost Plus (Nasdaq: CPWM  ) have also roughly doubled since Restoration Hardware was taken private three years ago. I realize that Restoration Hardware shoppers wouldn't be caught dead at a Bed Bath & Beyond or a Cost Plus World Market, but these are encouraging signs for housewares in general.

We still don't know how many shares Restoration Hardware is looking to sell, let alone at what price. We'll save a fairer valuation of the offering until underwriters shed some light there. However, this still seems like an incomplete turnaround. Until the company begins opening net new stores or proves that it can sustain its recent profitability, I'll pass on the Restoration movement.

It's too early to track Restoration Hardware through MyWatchlist, but you can add some of the other related companies mentioned in this article.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica and Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 12, 2011, at 10:04 PM, TMFSocialME wrote:

    Great article. I would be interested to know how much Restoration Hardware spends on marketing. The company's direct mailers are ridiculously large -- having never purchased anything from a RH store before I was surprised to get such a dense brochure from them in the mail.

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