Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Someone get Restoration Hardware a fire extinguisher. 

Shares in the furniture chain plunged by as much as 21 percent Thursday after it cut its annual financial forecasts and posted earnings results that wildly missed Wall Street's estimates. The stock dropped to its lowest point since going public in November 2012. Shares are now down 70 percent in the past year. 

Look Out Below
Shares in Restoration Hardware are down 70 percent in the past year
Source: Bloomberg

Back in February, Bloomberg News got ahold of a scathing memo from CEO Gary Friedman painting a bleak picture of the company, comparing it to a burning building with people on fire. Customer service was lacking, orders were late, sales growth was slowing and profits were declining.

In a subsequent interview with Bloomberg News, Friedman struck a more upbeat tone. He said he was confident the worst was behind the company and that the memo was meant to "empower" employees and get their attention.

Not so much. 

Instead, Restoration Hardware on Wednesday said it swung to a loss of $13.5 million in the latest quarter, compared to a $7.2 million profit a year earlier. It warned its profits would sink 40 percent this year as a new line of modern furniture has suffered delays and shortages. It said its membership program -- where you pay $100 a year to get a 25 percent discount on goods -- isn't exactly pushing customers to spend more. None of this squares with the company's stated goals of doubling annual sales to between $4 billion and $5 billion. 

Losing Out
Restoration Hardware swings to a loss
Source: Bloomberg

mupThe weakness is helping renew chatter that Restoration Hardware, a perennial private-equity plaything, could be in play yet again.

Odeon Capital analyst Anup Goswami recently put out a note calling the company an attractive candidate for a leveraged buyout. Restoration Hardware's net debt is only 1.68 times Ebitda. A private-equity buyer might find its small (and declining) market capitalization of $1.2 billion makes it viable to use debt to partially finance a deal -- even when paying as much as a 40 percent premium to the current stock price. 

Shrinking Shares
Restoration Hardware's withering market value
Source: Bloomberg

From a financial perspective, he's spot-on. The company is small. The debt load is manageable. Home goods are still pretty hot, as the housing market continues its upswing. And Restoration Hardware has a reputation for making home goods customers like. While comparable-store sales growth has plunged in recent quarters, Restoration Hardware is still booking 4 percent comparable sales growth at a time when most retailers are struggling to even get people into their stores. 

Sales Slump
Year-over-year change in sales at established Restoration Hardware Stores
Source: Bloomberg

The question is whether Restoration Hardware has the stomach for yet another buyout.

Dancing close to bankruptcy during the housing crash, the company became subject of a private-equity bidding war, in which a group of firms, along with its CEO, won out, taking the company private for about $180 million.

While the private-equity firms and the CEO made out nicely, it doesn't look like the financial maneuvering left the business on even footing. In a few short years, the company is back to losing money. Sales growth is declining. And the CEO is sounding the alarm on the company's operations.

Sale or no sale, Restoration Hardware clearly needs to figure out how to shore up its supply chain, fix its customer service, and get the right leadership in place to put out its fires.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net