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Restoration Hardware Gets Back in the Game

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This year's IPOs have been like little Muppets, running all over the place, sometimes bringing joy, sometimes stomping on investors' feet. So Restoration Hardware's (NYSE: RH  ) relaunch into the arms of the market seems like it could have gone any number of ways. The company had high-end credentials, dealt with some cash-flow issues, and had been private since 2008. Now that the dust has started to settle, let's look at the company and see whether it's worth adding to your portfolio.

Something with hardware?
You might not have heard of Restoration Hardware. The company has only 85 stores, mostly in American malls. For those not in the loop, Restoration Hardware -- which I'm going to refer to as Resto for the rest of this article, because that's what we called it when I worked next door to one in 2004 -- sells products that compete almost directly with Williams-Sonoma's (NYSE: WSM  ) Pottery Barn brand. Lots of linen, wood, and metal, with very little plastic thrown in. Resto also carries a range of high-end home decor pieces, like you'd find in Home Depot (NYSE: HD  ) -- house numbers, doorknobs, and the like.

Aside from its retail spaces, the company operates a large mail-order business, which accounted for 45%  of revenue in the 12-month period ending this July. Resto has been around since 1979 and is based in California. The company employs 2,900 people, with well over half of them running stores, and about a third employed on a part-time basis. In short -- its structure is similar to most other major retailers.

The Resto IPO
To understand where the company is now, we need to look back to why it went private in 2008. Back then, the housing market was crashing, equities were crashing, and Resto, which had been valued for buyout at almost $270 million in late 2007, ended up selling for $175 million in 2008. Things weren't looking good for the retailer, and even holiday sales fell off in 2007. To avert failure, Resto's management team engineered a buyout. CEO Gary Friedman, who had worked for Williams-Sonoma in the mid-1990s and left Resto this August, redefined the brand while it was private.

The company moved away from the kitsch gifts that littered its showrooms -- my father is the proud owner of a set of Resto record-shaped coasters -- replacing them with high-end, faux objets d'art. Since the buyout, the company has started growing sales again, with revenue up 22% for the 12 months ended in July. Same-store sales also increased, rising 29% over the same period.

Now, with its revitalization out of the way, Resto is on the move to expansion. The company is opening new Design Gallery locations, which are larger stores in 50 American markets. With a plan to enter all 50 markets in the next seven to 10 years, the company is hoping to double its floor space. Unsurprisingly, this is going to take some cash, which Resto is currently short on. The IPO was designed to give Resto the cash it needed to pay down some debt and open up its opportunities for future investment.

From here on out
Things look generally positive for Restoration Hardware, and the stock's steady rise since the IPO indicates that investors feel the same way. The company, valued at $175 million in 2008, is now worth $1.2 billion. The stock has risen 7% since the IPO, and Christmas should provide a strong boost to the company's bottom line, but there are plenty of challenges ahead.

In August, Resto removed Friedman from the CEO position, after allegations that he had been in a relationship with a subordinate 28 years his junior. He has since acted in an advisory role, and the new CEO, Carlos Alerbini, has been with the company for only two years. In a filing in late October, Resto warned that substantial costs had been incurred during the Friedman investigation and that more costs may come later.

The company is also going to have to battle the macroeconomic climate -- cue Fiscal Cliff Theme Song -- over the next year. High-end retailers from Coach to Williams-Sonoma are worried about the slow turnaround. With the election now decided, consumers are left to focus on the unknown outcome of politicians' backroom wrangling over taxes and benefits. Until that's decided, everyone is left up in the air.

The bottom line
But overall, I think Restoration Hardware has a lot to offer investors. With a fairly quiet, non-botched IPO, the company has started things off right. With 36 million shares outstanding and $33 million in income over the 12 months ended in July, the stock is currently trading at a pricey 36 times earnings. But that's certainly not out of the range of acceptability for a high-growth company. I think Resto is worth a look if you like what Williams-Sonoma does but you're looking for a more aggressive expansion.

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10/24/2016 4:00 PM
RH $29.83 Up +0.35 +1.19%
Restoration Hardwa… CAPS Rating: ***
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WSM $47.21 Up +0.22 +0.47%
Williams-Sonoma CAPS Rating: ***