I should have listened to my mother-in-law. Several years ago, she offered to give me the Knoll dining set, in her basement at the time, but I declined. I recognized the importance of its mid-century design but couldn't get past the unsettling idea that my husband would be slurping soup at the same table he had when he was six.
Silly me.
I recently spent months drooling over decorating magazines, ultimately opting to furnish our house with sleek appointments reeking of similar "retro cool." And I'm not alone. The New York Times reports that the market for modernist furniture, "once young, fun, and inexpensive, is superheating." Two weeks ago, Christie's auctioned off a trestle table, designed in 1948 by Carlos Mollino, for $3.824 million, nearly 20 times the highest estimate. (Hmmm, too bad Christie's is privately held..)
For those of us with more modest budgets, the good news is that you don't have to tap your home equity to indulge your craving for fashionable interior design. Many businesses are recognizing that profit potential may lie in tapping the public's heightened awareness of style, some with the kind of budget-mindedness shown on cable home-decorating shows. This presents some interesting opportunities for investors, too.
Designing smart investments
It used to be that if your taste ran toward contemporary furnishings, you'd order from IKEA and then struggle to figure out how to use that little thingamabob they included to assemble all the pieces. The privately held Swedish retailer continues to grow, planning on entering new U.S. markets with more retail stores to capture the interest in modernism.
Coming in October, Target (NYSE:TGT) will introduce a new home collection, "Vintage Modern," designed by Thomas O'Brien, the founder of design firm Aero Studios Ltd. and Aero's New York home furnishing store. More than 500 items will be included in the assortment, including furniture, lighting, accessories, dinnerware, bedding, bath, and stationery.
Privately owned Euromarket Designs, owner of Crate & Barrel, has recently rolled out CB2, a collection of retro designs marketed to a young audience, and Williams-Sonoma (NYSE:WSM) has entered the market through its hot West Elm stores, geared to exclusive modern furnishings at price points from $19 to $399. Even hotels are reflecting this vogue, with Starwood (NYSE:HOT) planning to "democratize design" by opening a new lower-rate lodging chain with loft-like rooms infused with ambience similar to its hip W Hotels.
But for perhaps the most interesting investment opportunity, pull up a chair, secure your wallet, and get comfy with Design Within Reach (NASDAQ:DWRI). This super-chic vendor has crafted and occupied a unique niche among furniture retailers. Founded in 1998, DWR hawks modern furniture from prominent international designers such as Le Corbusier, Eero Saarinen, and Isamu Noguchi, as well as up-and-coming designers, through a mail-order catalog (pure eye candy), online sales, and 40 retail stores in upscale locales.
While not within the grasp of casual expenditures, DWR does extend the formerly rarefied world of classic modernist design beyond the heady airs of the auction halls and designer showrooms. That's exactly what company founder Rob Forbes meant in choosing its name. The company would strive to make modern design more accessible and attainable, although it still wouldn't go so far as to offer bargain-basement prices. (If you're looking for that, check out local estate sales.) If used stuff isn't your style, then be prepared to shell out anywhere from $80 for a flower pot to $3,348 for a newly produced Mies van der Rohe Barcelona chair.
Product offerings include indoor and outdoor furniture, lighting, floor coverings, and other accessories. Merchandise, frequently garnering attention through appearances on Queer Eye for the Straight Guy, is deliberately restricted to approximately 700 items, with 75% of revenue generated from the top 100 items. The limited inventory allows it to be housed at just one warehouse and for most products to be available for current shipping, unlike the industry standard, which usually makes you wait an additional four months for delivery.
DWR strives to make shopping for fashionable design more approachable, eschewing even traditional advertising in favor of weekly emails focused as much on design trends as on special promotions. The sales and marketing approach worked for me -- I recently purchased four Bellini "injection-molded plastic" chairs (among its least expensive items), which I first spotted in the catalog after being allowed to actually take the floor model home and test it out over the weekend. Now that's cool customer service.
Painting DWR's numbers green
In other respects, too, DWR looks hot. BusinessWeek recently slotted DWR in eighth place in its listing of growth stocks. It isn't easy to evaluate a company which has only been publicly traded for one year. Yet it's not hard to be impressed by its initial phenomenal success. Sporting a price-to-earnings ratio (P/E) of approximately 57 -- more than twice that of Williams-Sonoma -- DWRI stock is not for value-minded investors. It's the company's past and projected growth rates, coupled with its strong first-quarter balance sheet, reflecting $12 million in cash and a debt-to-equity ratio of 0.03, that make it alluring and provide a healthy foundation for continued expansion.
Net sales for fiscal year 2004 increased 49% to $120.6 million, from $81.1 million in the prior year. Net income similarly rose to $3.74 million, an approximate 26% increase. Sales strength continued into 2005 as first-quarter net sales increased 58% to $35.5 million from the same period a year ago. The company projects fiscal 2005 revenues of $160 to $165 million.
A couple of flaws here and there
Like scratches on a sleek new coffee table, a few blips can be found in the financials. With more new store openings and increased catalog mailings, expenses (not surprisingly) increased to $45.5 million for fiscal 2004, from $33 million the previous year. For the first quarter of 2005, expenses increased to $13 million, from $8.7 million in the same period last year. The firm's operating margin reflected this, going from 3.3% in fiscal 2003 to 5.1% in fiscal 2004.
In addition, the fact that about 50% of current merchandise is purchased in Europe means that DWR faces pressure from the strength of the euro and increased shipping costs, which contributed to a decline in gross margin to 46% from 46.6% in the prior year, and a decline in the first quarter of 2005 to 43.8%, from 46.3% in the same period last year. The company's recent announcement that it will embark on developing its own exclusive merchandise may help in the future to alleviate some of this pressure, simultaneously strengthening its brand.
As with any young, growing company, DWR faces challenges. The company has opened 17 new stores since the beginning of 2005, in line with its stated goal of opening 18-20 stores in 2005. It remains to be seen how well it will manage its growth, since it plans to open studios "aggressively" over the next three years -- and introduce new product lines.
Of particular concern is the question of how sales would fare in the event of a consumer spending slowdown or a decline in the housing market. DWR acknowledges that it goes after 10% of the furniture-buying population, those with an average household income of $125,000. Its publicized client list sports an impressive roster of well-known names from the architecture and art worlds. OK, but will these clients still purchase to the same extent if their own businesses begin to slow? Will you? That $34 set of flower vases at West Elm might do the trick instead.
In sum, if your portfolio seems a bit dowdy, DWR could add an edge to your holdings and capture the growth spot. The company has done a fabulous job executing its innovative marketing and business models. From where I sit, though, it seems wise to be cautious and view DWR as an exciting, but risky play, given possible cyclical dips. In the meantime, I've got to find out what ever happened to that Eames lounge chair last seen in my husband's old bedroom....
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Stylish Fool contributor S.J. Caplan welcomes comments. She does not own any of the stocks mentioned, but she loves her new plastic chairs. The Fool has a strict disclosure policy.
