Restoration Hardware Seeks Premium in IPO as Home Sales Improve
Restoration Hardware Holdings Inc. (RH) is betting investors will be willing to pay a 60 percent premium to buy shares in its initial public offering as the home-furnishing retailer’s profits surge and the housing market recovers.
The Corte Madera, California-based company and shareholders are seeking as much as $123.9 million in the sale today, offering 5.2 million shares for $22 to $24 each, according to regulatory filings. The midpoint values Restoration Hardware at $850.3 million, or 26 times net income in the 12 months through July, data compiled by Bloomberg show. That’s almost two-thirds more than the average of 16 for home retailers Williams-Sonoma Inc. (WSM), Ethan Allen Interiors Inc. (ETH) and Bed Bath & Beyond Inc. (BBBY)
Restoration Hardware, the seller of leather couches and tables made of salvaged wood, increased net income more than sixfold in the 12 months through July by closing stores and selling more online and through catalogs. Now, the company is positioned to benefit from continued sales growth as U.S. housing starts climb to the highest level in four years, according to Ipox Schuster LLC’s Josef Schuster.
“That’s where the offering comes in, to capture the imagination of continued positive momentum in the U.S. housing market,” Schuster, founder of the Chicago-based firm that oversees about $2 billion, said in a phone interview. “There’s definitely money out there for this kind of deal.”
The shares being offered represent a 14 percent stake in Restoration Hardware, regulatory filings show. The company is offering 4.8 million of the shares in the sale, while management and other holders are selling about 382,000 shares.
Net income at Restoration Hardware jumped in the 12 months through July to $33.1 million compared with $4.9 million a year earlier, according to filings. Sales increased 22 percent in the same period to $1.05 billion.
The company reduced its number of stores to 74 from 95 in the two years through January, reversing a $28.7 million annual net loss to $20.6 million of profit, regulatory filings show. Revenue from direct-to-consumer sales increased to 46 percent of sales in the last 12 months compared with 39 percent in the year through January 2010, according to the filings.
The housing recovery and improving consumer sentiment will fuel demand for furniture and help propel further profit growth at Restoration Hardware, according to Ipox’s Schuster.
Housing starts in the U.S. surged 15 percent in September to the highest level in four years, adding to signs of a revival in the industry at the heart of the financial crisis. Consumer confidence rose to a five-year high in October, an economic report showed last week, suggesting that the real-estate revival is bolstering household finances and will help sustain gains in spending.
Including net debt, the midpoint of the offering range values Restoration Hardware at $903.6 million including net debt, or about 13 times earnings before interest, taxes, depreciation and amortization of $67.5 million in the 12-month period, filings show. That’s also higher than Williams-Sonoma, Ethan Allen and Bed Bath, which have an average enterprise value-to-Ebitda ratio of 9.3 times for comparable periods, data compiled by Bloomberg show.
The company also cites an adjusted Ebitda of $87.3 million in the same period that excludes one-time charges for things such as non-cash compensation and the $2 million cost of an investigation into a personal relationship between former co- Chief Executive Officer Gary Friedman and an employee, according to filings.
Restoration Hardware is moving ahead with the offering after Friedman announced in August he would step down. The 55- year-old, who has frequently appeared in the large catalogs for which the company is known, will stay on as an adviser and board observer, the filing shows. As of yesterday, a letter from him is on the home page of the company’s website, citing Don Quixote and ending with the words “Carpe Diem.”
“Friedman’s leadership and creative talents were important contributors to the company’s performance during his tenure,” Restoration Hardware said in its regulatory filings. “There can be no assurance that the absence of Mr. Friedman in his former roles will not have an adverse impact on us.”
“At this stage, they’re a mature brand that can be managed,” Gaskins said. “I don’t think they need the star power of the entrepreneur.”
Friedman, who is not selling in the IPO, will own about a 16 percent stake in Restoration Hardware after the offering, worth about $133 million at the midpoint of the range, data compiled by Bloomberg show.
Restoration Hardware didn’t name competitors in its filings. It operates in a market “characterized by smaller, independent competitors” and targets consumers with household incomes of $200,000 or higher, according to filings.
“It’s got good growth, it’s got good trend lines, and if those trend lines continue, it’ll be fine,” Gaskins said. “People like to buy branded companies that can participate in the macro trend.”
Restoration Hardware, previously listed on the Nasdaq Stock Market, was bought by a group including Friedman and private equity firm Catterton Partners in 2008. After the IPO, Catterton will hold a 32 percent stake, filings show.
The IPO will go ahead as scheduled despite disruptions in New York caused by Hurricane Sandy this week, according to a person familiar with the situation, who declined to be named because the information is private. Southcross Energy Partners LP, the Dallas-based provider of natural gas gathering and transmission services, pushed its planned offering back by one day to today because of disruptions caused by the storm, said another person, who also declined to be named.
Restoration Hardware will be listed on the New York Stock Exchange under the symbol RH. Bank of America Corp. and Goldman Sachs Group Inc. are leading the sale.
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