This Company Is Taking Over American Homes

When I lived in England, most of my workmates knew Williams-Sonoma (NYSE: WSM  ) through the company's Pottery Barn brand. Not because the brand was popular there, but because it was featured in an episode of Friends. Those were the days when Pottery Barn was miles out in front of Restoration Hardware (NYSE: RH  ) , which had been reduced to selling novelty coasters and lamps shaped like kitchen tools.

After that low point, Resto was hammered by the housing market crash, and in 2008, the company was taken private. Over the last five years, Resto rebuilt its brand and its operations, and in 2012, it was relaunched in a much anticipated IPO. Since going public, the stock has risen more than 130%, and the company's most recent earnings release highlights how far Restoration has come, and how far it can run.

Market share growth
The biggest number in last week's release was the company's incredible comparable sales growth. In its first quarter, comparable sales grew 41% compared to the same period a year prior. Pottery Barn grew its comparable sales by 7.6% over its 2012 first quarter. The laggard in the group was Bed Bath & Beyond, which only managed to bump sales 2.5% in its last reported quarter.

The growth of same-store sales at Restoration Hardware points to the company's incredible surge in brand strength. With only 70 locations and 14 outlets, Resto is still a smaller business -- Pottery Barn operates 195 stores -- but the growth potential is huge. According to its conference call, the company is planning to add between 10 and 15 stores a year, which will quickly put it over 100 locations. That's going to increase the brand's reach, but the footprint expansion is just the start.

Exponential potential
Both Restoration Hardware and Williams-Sonoma benefit from their expansive back catalog of products. Last quarter, Resto increased its direct sales by 38% over the previous year, with direct sales now accounting for 47% of total revenue. In an odd coincidence, Williams-Sonoma also generated 47% of its revenue through direct sales.

As Restoration Hardware grows, its direct growth should continue to push ahead. Right now, the company claims to only have 20% of its total offering available at its retail locations. In tandem with that fact, the company also said on the call that when products do make it to a retail display, sales can increase by up to 150%.

The bottom line
Restoration Hardware is one of the most interesting companies that I've covered, in part due to its phenomenal growth, and in part due to my background. I had the good fortune to work for Williams-Sonoma about 10 years ago, and it made me a firm believer in the future of the company. Resto was a joke at the time, but now it seems like a real force to be reckoned with. While I'm nowhere near reconsidering my Williams-Sonoma position, for the first time, I'm thinking about adding a competitor to my portfolio.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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