RH – Restoration Hardware, Swimming Upstream

I am always interested in turnaround stories and in companies who are swimming upstream. Such a company is Restoration Hardware.

Restoration Hardware has been public since November 2012 and had been owned by PE firms in the past. I love them for their enormous couches because I am an enormous Chevy Impala and like to lounge on a big couch.

This is a damn big couch. You can get any of their leather couches in a 10 foot length.

Renovation Hardware leadership

Renovation Hardware is led by Gary Friedman. He is a seasoned and successful retailer – reminds me of Ralph Lauren – as evidenced by his career starting as a stock boy for The Gap in 1977 to being the President/CEO of Williams Sonoma as his last job in a fourteen year tenure at WS.

 1. During that tenure, Friedman drove Pottery Barn – wholly owned subsidiary of Wms Sonoma – from sales of $50MM to $1B. Hello, America!

 2. He also drove the Wms Sonoma Grande Cuisine stores from $100MM to almost $1B.

 3. While at Wms Sonoma, he also did the prep work for West Elm which launched after his departure. Another big success.

This is an extraordinary performance and marks Friedman as a builder of sales revenue. Keep that in mind as we discuss the company.

He is a creative guy and that creativity is on display at Restoration Hardware.

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Gary Friedman with two of his many nieces at the Restoration Hardware store opening in Austin By God Texas at the Domain Northside in September 2016.

Restoration Hardware Creativity

So, we know Restoration Hardware as a design driven home furnishings company, but they are a lot more.

 1. Amongst their other endeavors is the creation of a substantial brick-and-mortar presence – 60-90,000 SF – in the face of a sentiment which says, “Retail is dead. The Internet is where the action is, baby.” Talk about swimming against the current – Wayfair, you listening to me?

 2. They have converted their client face from a simple retailer to a membership retailer – talking to you, Amazon. For $100 annually, you get:

Access to design assistance;

Approximately 25% off everything;

An additional 20% off sales items; and,

First crack at promotional items and sales.

 3. They are also a catalog business with an heirloom quality catalog as well as a substantial and robust web presence.

 4. They are a restaurateur with restaurants which gross $4-5MM. These are in their own brick-and-mortar stores. [One of my favorite places to nibble is the Neiman Marcus restaurants, but I cannot imagine them doing these kind of numbers.]

 5. They are a multi-faceted lifestyle brand with distinct focus on RH, RH Modern, RH Baby & Child, RH Teen, and RH Interior Design.

 6. They offer product categories of Living, Dining, Bed, Bath, Lighting, Textiles, Rugs, Windows, Hardware, Decor, Art, Gifts, and Outdoor.

Who is driving this dramatic lifestyle business? I think it’s the guy who drove Pottery Barn, Wms Sonoma, and whipped West Elm into shape.

Restoration Hardware Stock

So, the stock has been an interesting play over the last few years. Let’s take a look at it, shall we?

July 2016, you’re looking at a $25 stock because of the inability to deliver sales. Come recent developments, the stock price is at $150/share. That’s a six bagger over a two year period? Recently, the stock has come back a little.

Recently, the company and Friedman have been trying to articulate their vision and financial mission. Until recently, they have been perceived as a big winner. Even recent events look like a gentle pullback. Nice ride for the last two years, no?

Friedman has been mumbling that he is not chasing sales – meaning he is not going to discount like a web company to drive the top line – but, rather, is looking for good quality, higher margin business.

He has also made an enormous commitment to the brick-and-mortar stores on a “design center” level. They are ravishing stores. Watch this video to get an idea of how impressive their stores are and what a commitment it is.

The membership approach is a very interesting approach for a lifestyle brand, but remember that Costco, Sams, and Amazon have huge membership cash flows. This is a “second mover” kind of thing which sounds like a good move to me.

The restaurants seem to be swimming outside their lane, but maybe not.

OK, what got my attention initially is that this was a $160.82 stock a few days ago which is trading at $129 after hours today. Hello, America!

Bottom line it, Big Red Car

Restoration Hardware is a very interesting company which is flying into a head wind of conventional wisdom. They should be getting out of brick-and-mortar retail and focusing on the web. They are, in fact, going all in. But, they are doing both while still publishing a catalog.

The chap running it is a winner as evidenced by his career highlights.

The merchandise is excellent, bit pricey, maybe, but excellent.

The membership approach is a nouveau approach, but not too far out there. Call me if you hear they undertake an Initial Coin Offering, please.

So, dear reader, there you have it, a company plotting its own course, flaunting the conventional wisdom, led by a very believable chap, and a bit of juju in the mix.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Tell me what you think about this. Buy on the dip?