Can Restoration Hardware Put It Together? Dave Marino-Nachison (TMF Braden)
August 19, 1999
Specialty home furnishings retailer Restoration Hardware Inc. (Nasdaq: RSTO) turned in second-quarter results last night, reporting Q2 losses of $0.15 per share, a penny better than expected but well off last year's $0.04 loss. Sales were $53.9 million, up about 36% from last year as 23 new stores opened since the last Q2.
Restoration is in the process of adopting a new distribution strategy: instead of maintaining its furniture inventories at near-store third-party locations, it's establishing company-operated regional distribution centers. That meant, at least in Q2, that merchandise inventories were lower than planned, hurting sales.
As a result, Restoration had to (okay, it didn't have to, but it elected to -- probably not a bad way to foster customer loyalty) honor orders made during a large-scale furniture sale in Q1 during which sale items were marked down between 10% to 25% off their regularly scheduled prices.
The effect on same-store sales (up just 1.2% from a year ago) and gross margins (down to 27.6% from 29.7% in 1998) was predictable.
"We firmly believe that the customer interest in our product was not a factor [in Q2]," said Chairman and CEO Stephen Gordon, "but, rather, our ability to fill current orders while still fulfilling first quarter orders and the time it took to transition product from our third party warehouses into our distribution centers."
Could be, but investors should nevertheless proceed with caution. Inexpensive stocks -- at about $9 per share, Restoration stock is about $10 below its IPO price of last June -- aren't always values, particularly when investors have other, better options: Restoration is currently trading at about 45 times projected full-year EPS, which is actually a bit more than the powerful, if not directly comparable, Home Depot (NYSE: HD). Hmm.
That raises an interesting question, doesn't it? (Please, for this article's sake, say yes and continue reading.) Against whom, exactly, does Restoration compete? With its array of "classic, high-quality furniture, lighting, home furnishings and functional and decorative hardware," it seems to fall somewhere between Home Depot and, say, Crate & Barrel.
It has 74 stores. The company's most recent 10-K filing states that Restoration's "merchandise strategy and our stores' architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35- to 55-year-old customer." It doesn't, frankly, appear that the company has much in the way of defenses against swings in the economy, although its new merchandising and distribution system should help it better respond to shifts in consumer taste.
Restoration's neato, no question about it. But having visited a few of the company's local stores, one wonders whether even a healthy, well-run Restoration Hardware would be able to justify a national store network based on this statement from the company's online investor relations area:
"The year was 1979 and our founder, Stephen Gordon, was restoring his Queen Anne Victorian house in Eureka, California. After spending endless days tracking down missing bits and pieces of authentic period hardware, lighting fixtures and finishes, Gordon found there were a lot of people with the same problems."
"Today," the site continues, "Restoration Hardware is a rapidly expanding business with a near-cult following."
A cynic might be reminded of a certain J. Peterman -- the upscale apparel and home decor retailer immortalized in the Seinfeld sitcom nearly forced to liquidate before being bought out by Paul Harris Stores (Nasdaq: PAUH) in March for a scant $10 million in cash -- as both companies like to reassure shoppers of the wisdom of their purchases with personalized tales of consumer derring-do.
But even in that department, Restoration seems to come up short: just compare its "Be it ice-cream jimmies or freshly grated parmesan, one would be truly challenged to find a better storage and shaking container.... My daughter Zoe insists upon cinnamon toast" to Peterman's yarns about wrestling lions for the right to market the world's most comfortable Oxford.
This isn't to say Restoration is in any danger of bankruptcy. Neither do I mean to suggest that I have any problem whatsoever with Zoe; I'm sure she's a wonderful girl, as we have the same taste in breakfast treats.
But investors still might want to wait a bit before installing this one into their portfolios. Restoration relies on a big Q4 to make each year profitable and a look at the company's full-year results should prove telling. Careful tracking of the company's online operations might also be worthwhile.