Has Restoration Hardware Gone Too Far With Its Catalogs This Time?

Big catalogs have paid off for this upscale home furnishings retailer before, so in 2014 Restoration Hardware has sent out even more catalogs.

Jun 2, 2014 at 5:30PM

While catalogs may seem like a relic to some shoppers at a time when online shopping continues to gain traction, their retro appeal benefits some companies. Restoration Hardware (NYSE:RH) sells a variety of classic home decoration products, appliances, and furniture through catalogs and huge stores that, when entered, are reminiscent of museums. In fact, this retailer actually bought an old museum in Boston and made it into one of its stores. This upscale home furnishings retailer has also gained notoriety for sending out huge catalogs to its customers. As the catalog shipments from Restoration Hardware have grown larger over the years, the retailer's revenue has risen dramatically as well. This year's shipment might be too much for some customers, although this catalog oriented strategy has been very successful in past years. 

An effective but controversial catalog strategy
Restoration Hardware received criticism back in 2011 for sending out a huge catalog. While the retailer tried to promote its huge catalog as environmentally friendly even back then, noting that it contained recycled paper, some critics weren't convinced. The next year, Restoration Hardware sent out another catalog with a page count more than 50% higher. While the catalog was costly and many viewed it as wasteful, it did succeed in getting the retailer the attention and the customers it wanted.

For its first year as a public company again, Restoration Hardware posted some incredible comps numbers. The upscale home furnishings retailer posted same-store sales growth of 28% (without including the extra calendar week) against a figure of 25% for the previous year. These figures actually surpassed its overall revenue growth, so new stores didn't drive its revenue growth; total revenue grew by 24% in 2011 and 22% in 2012, again without including the extra week for 2012.

After the success of this strategy in 2013, once again Restoration Hardware shipped out a huge catalog and put up some huge same-store sales numbers. While the catalog the retailer shipped out in 2011 weighed more than three pounds, it sent out a six-pound package of catalogs in 2013.Once again, the catalogs did their job. At the end of the year, the retailer posted revenue growth of 33% and same-store sales growth of 27% (on a 52-week basis).

Customers got a lot more catalogs in 2014
In May 2014, the catalog delivery from Restoration Hardware nearly tripled in weight to tip the scales at 17 pounds. Actually, the retailer shipped out 13 separate catalogs altogether, which it calls source books. Once again, the retailer promoted its source books as environmentally friendly. It said that it used carbon-neutral shipping, and explained that its customers would now only receive the source books once per year. However, this time Restoration Hardware may have gone too far with its catalogs.

Unusually, Restoration Hardware doesn't have its own Facebook page aside from the default Wikipedia entry, although this might help the brand appear more exclusive. The retailer also hasn't used Twitter to make any tweets since March 2011. However, the 17-pound catalog package has received some attention on other sites, where people complained about receiving the catalogs, complained about their impact on the environment, and mentioned throwing them out. In addition, the Boston Globe shared an article about the 17-pound catalog delivery on Facebook, and its post received similar comments. Even with the complaints, market conditions seem favorable for Restoration Hardware right now.

The high-end home furnishings market
While Williams-Sonoma (NYSE:WSM) has not been growing as rapidly as Restoration Hardware has recently, it still posted encouraging results for the first quarter of 2014. Overall same-store sales jumped up 10%, led by West Elm with a blazing 18.8% rise and Pbteen with a strong 12% rise. While the main Williams-Sonoma brand reported a slightly weaker performance at 6%, this still shows that the market for high-end home furnishings is growing right now.

Foolish takeaway
Restoration Hardware seems like it's hitting on all cylinders, and the results from Williams-Sonoma show the strength of the sector. While Restoration Hardware doesn't look very good on earnings-based metrics at the moment, it appears that the retailer is investing in growth (and lots of catalogs) and shareholders are OK with that considering the numbers it's been putting up. The main risk for this retailer is that it may have angered its customers by sending 17 pounds of catalogs to their homes. Aside from that, its strategy seems to be working.

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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Facebook, Twitter, and Williams-Sonoma. The Motley Fool owns shares of Facebook. 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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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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