Can Restoration Hardware's New Strategy Deliver?

I imagine that I'm right in the target demographic for Restoration Hardware (NYSE: RH  ) -- youngish, homeowner, living in the suburbs of a major metropolitan area. So it wasn't a shock to get the company's new catalog the other day. What was surprising was that it was delivered by UPS and that the set of "source books" weighed in at over 10 pounds.

Restoration Hardware has created a 3,300-page set of catalogs, covering everything from lamps to mirrored obelisks -- popular with self-absorbed Egyptian kings the world over. The company has invested a lot of actual and mental capital in its direct sales, and it's seeing some strong results already.

Homewares coming to you direct
There seems to be an unwritten rule that if I want to buy a pre-weathered end table, I have to do it from a catalog. Restoration Hardware has 3,300 pages of this stuff while Williams-Sonoma (NYSE: WSM  ) dropped more than 20 catalogs last year just for its eponymous brand. Both companies rely heavily on direct-to-consumer sales, and both have seen success with the direct model.

Restoration Hardware had a 24% increase in direct revenue last quarter while Williams-Sonoma had a 17.2% increase in its direct sales. Restoration Hardware now makes 48% of its total revenue through direct sales, and Williams-Sonoma just passed the halfway mark, making up 50.4% of revenue last quarter.

Restoration Hardware is trying to make its direct business stronger and leaner, and this year the company has cut back on mailings, opting for the once-a-year set of collected tomes instead of 13 different mailings. The company believes that the source books still offer shoppers a better understanding of the wide range of products available in a way that Restoration Hardware's website doesn't. 

Restoration Hardware's catalog future
The single set of source books seems like it's here to stay. Restoration Hardware has been able to increase shipping efficiency and offset its printing and shipping carbon impact through a program with UPS. The move was certainly an effort to cut off criticism from environmentalists regarding the shipping of thousands of 17-pound bundles of paper. It may have been a good plan, but it wasn't quite enough, as the company got a decent bit of flack from online commenters.

It's not enough to deter the company, though, and Restoration Hardware is set on pushing its direct sales channel higher on the back of its source books. In addition to showcasing the range of products available for delivery, the books also act to pull customers into the store. That's helped the company put up double-digit increases in store revenue while its direct business continues to grow.

For investors, the source book strategy offers an interesting alternative to traditional catalog delivery. No other business does quite the same thing, and Restoration Hardware investors are in for a ride. By delivering all the books at once, the company may risk a drop in sales at the end of the year, further from the time of shipment. On the other hand, the catalogs may enjoy a longer shelf life due to their annual delivery, making them more relevant to shoppers throughout the year. It's a fascinating experiment, if nothing else.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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8/27/2015 4:02 PM
RH $92.90 Down -0.87 -0.93%
Restoration Hardwa… CAPS Rating: ***
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Williams-Sonoma CAPS Rating: ***