Restoration Hardware Channels Roosevelt Ahead of IPO: Retail

Restoration Hardware Channels Roosevelt Ahead of IPO
While Restoration Hardware’s revenue rose 27 percent to $420.4 million for the six months ended July 30 and the retailer swung to a profit last year, the housing slump still weighs on the home-decor sector. Photographer: Tony Avelar/Bloomberg

“Every movement has a lunatic fringe,” blares a headline in Restoration Hardware Inc.’s 616-page fall catalog, a reference to Theodore Roosevelt’s famous line about anarchists.

In an accompanying essay, Chairman and Co-Chief Executive Officer Gary Friedman -- photographed with designer stubble, distressed jeans and a vintage leather jacket -- finds common cause with the 26th U.S. president, an iconoclast known for his macho, cowboy charisma.

It’s all part of Friedman’s strategy to stand out from the crowd as the retailer prepares for an initial stock offering. Restoration Hardware’s latest furnishings feature a fresh take on late 19th- and early 20th-century home decor, an attempt to differentiate itself from the 1950s and 1960s styles sold by such rivals as Williams-Sonoma Inc. and Crate & Barrel, says Judith Russell, editor of the retail newsletter Robin Report.

“They’re definitely trendsetting,” said Russell, who is based in New York. “They’re taking a very different route from the furniture guys who are harking back to the mid-century stuff that’s very popular now.”

While Restoration Hardware’s revenue rose 27 percent to $420.4 million for the six months ended July 30 and the retailer swung to a profit last year, the housing slump still weighs on the home-decor sector. With new home sales falling to a six-month low in August, and unemployment at 9.1 percent, home-goods companies are grappling to attract shoppers -- even the wealthy ones targeted by Restoration Hardware.

Potential Slowdown

The retail chain faces a potential “slowdown in consumer spending at the high end,” said Kristine Koerber, a New York-based equity research analyst at Merriman Capital Inc. “So far, the high-end consumer has held up and we’ll just have to wait and see if he continues to hold up.”

In mid-September, the Corte Madera, California-based company announced plans to raise $150 million in an initial public offering to repay debt. In the filing, Restoration Hardware, owned by the private-equity firm Catterton Partners, cited a “sophisticated aesthetic” as its key differentiator and attraction for affluent shoppers. A company spokeswoman didn’t return calls and e-mails seeking comment for this story.

With 87 stores and 10 outlet locations in the U.S. and Canada as of July 30, Restoration Hardware has this year opened stores in San Francisco’s hip SOMA district and East Hampton, and took over the Williams-Sonoma Home store in Beverly Hills. The chain is aiming at two demographics, say analysts: high net-worth older consumers looking to upgrade and aspirational young professionals decorating their first home.

Hand Loomed

While the prices are comparable to Crate & Barrel’s offerings, Restoration Hardware’s marketing puts a premium on fabric, construction and details. The $3,495 Kensington leather sofa features 1,500 hand-hammered brass studs and 85 buttons. The catalog/magalog/source book is filled with paeans to old-world luxury -- the bedding is “woven from the finest Belgian flax;” the wool rugs are “hand loomed by master artisans.”

The strategy is promising, said Michael Dart, partner at Kurt Salmon Associates, a retail consulting firm.

“On the high end, there’s an awful lot of dollars and a whole lot of people looking for unique merchandise, unique product, that’s very high quality, and they spend on it when they find it,” said Dart, who’s based in San Francisco.

The focus on wealthier Americans is not without risk, however, because fluctuations in the stock market could affect demand for tony merchandise, he said.

Garden Trolls

Founded in 1979, Restoration Hardware first went public in 1998, and Friedman joined the company in 2001 from Williams-Sonoma, where he was the head of merchandising marketing for eight years. When he arrived, Restoration Hardware was known as a generic home furnishings retailer that sold everything from dog chew toys to garden troll ornaments. The chain rode the housing and credit boom, almost doubling revenue from 2002 to 2007.

Sales growth slowed to the single digits after the housing market collapsed, and in 2008 Catterton Partners picked up Restoration Hardware for about $179 million.

“There were too many niches out there, there was way too much competition,” said Robin Report’s Russell. “They needed to figure out what place they needed to occupy and not just be another hardware store or Crate & Barrel or Home Depot.”

As other home retailers focused on conservative, time-proof designs and discount prices, Restoration spent the past three years as a private company sharpening its image. Friedman and his team tossed unmemorable home accessories, toys and gadgets, sold the affordable home decor brand Brocade Home, and rebranded as an upscale home retailer with a unique style. In search of inspiration and a defining look, Friedman and his team traveled widely and replaced much of the furniture.

Masculine Mandate

Friedman is the driving force behind Restoration Hardware’s new face, and if some of the furniture elements, like the $1,895 leather aviator chair set in an aluminum frame, or $1,995 metal scissor lift transformed into a coffee table, have a strong masculine edge to them, that’s his mandate.

Donal Brophy, 32, the Irish co-owner of the New York bar and restaurant Mary Queen of Scots, was browsing the store in Manhattan’s Flatiron district last week.

“The style reminds me of the rustic, cultural style I grew up with but has a New York edge to it, it’s very masculine,” said Brophy, who was shopping for office furniture. “It has the whole Boardwalk Empire aesthetic that’s really in right now,” he added, referring to the HBO prohibition-era gangster drama starring Steve Buscemi.

Luxury Wave

Friedman is “riding two interesting waves right now: there is a wave that is doing more remodeling versus rebuilding and buying,” said Sherif Mityas, a partner at the A.T. Kearney consulting firm in Chicago. “And he is also riding an enormous wave of luxury. And by positioning himself as more luxury, more aspirational, he is riding two waves at once.”

The fifth-largest home goods chain by sales, Restoration Hardware lags behind the leader, Williams-Sonoma, whose $3.1 billion in 2010 revenue dwarfed Restoration’s $896.5 million.

Staying relevant will require a constant flow of new merchandise, Mityas said.

“Always add something new, so people are buying over multiple years, as opposed to buying once, and then you don’t have to go back, because it’s the same old stuff,” he said.

Friedman concludes his catalog essay by asking: “Are we part of the ‘lunatic fringe?’ If it means, as President Roosevelt said in his speech at the Sorbonne, that ‘his place shall never be with those cold and timid souls who neither know victory nor defeat,’ then put us in that arena.”

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