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Who's That Barking At My Heels?

October 24, 2012
I am sure one of the most boring jobs at a brokerage house is reading through prospectuses for IPOs. They can put you to sleep faster than Ambien. And, since I don’t sleep very well and don’t want to get addicted to a sleep aid, I thought reading Restoration Hardware’s June, 2012 preliminary prospectus while propped up in bed one night would do the trick. But, instead of slipping off to dream land, I was so startled by what I read, I didn’t sleep a wink!

Right there, in black and white, in their Competitive Strengths section, it said, “Specialty stores beware, we are becoming your worst nightmare.” Well, it didn’t say that exactly; but, it was easy to read between the lines. What it actually said was, “We believe Restoration Hardware stands alone as a leading luxury brand of inspired design, and is redefining the highly fragmented home furnishings market by providing dominant merchandise assortments across a growing number of categories.” All of this allows them to attract “affluent consumers from designer showrooms and high-end boutiques.” If we read “high-end boutiques” as outdoor specialty stores you can see where the nightmare scenario came from.

It gets worse.

They plan to grow. In their growth strategy section Restoration says “we have an opportunity to significantly increase our sales by transforming our real estate platform from a mall-based retail footprint to a portfolio focused on full line Design Galleries . . . which will have approximately three times the selling square footage of our current average Gallery.”

In fact, they opened their first Design Galleries in 2011 in Los Angeles and Houston where they consolidated demand by closing their existing mall based retail stores. By doing this, they increased their Los Angeles store demand by 85% and direct demand by 30%. In Houston their store demand went up by 60% and their direct demand went up by 50%. I am not sure what store or direct demand means; but, it sure sounds like they did good!

Good enough, in fact, that in the next 24 months they plan to open new concept galleries in Scottsdale, Boston, Greenwich (Connecticut), and Atlanta. They are actively exploring New York City, Miami, Dallas and Chicago and have identified a total of 50 markets where their real estate holdings will undergo transformation.

These new stores are and will be beautifully designed. They plan for them to be in older, usually historic, buildings with lots of architectural interest. They will have more selling square footage, less on-site storage, and utilize non-traditional selling space such as rooftops and garden courtyards. Of course, they will continue the gallery format they went to in 2009 and 2010 that presents their products in sophisticated lifestyle settings. Not only will these galleries be seductive, they will carry lower occupancy costs than their typical retail spaces do now.

But, store size is not the only thing expanding. They are expanding their services, too. They are “developing and will be introducing in select locations our interior design services that provide our customers with complimentary in-store and in-home design consultation. . . In addition, an expanded portion of our product offering can be customized . . . including different choices of materials, fabrics and finishes.” Gosh, that sounds like what an outdoor specialty store does right now.

The prospectus shows their commitment to the outdoor segment. The prospectus is peppered with “outdoor furniture this” and “outdoor furniture that.” For example, “...outdoor furniture, where we continue to broaden our assortments.” Or, “We have a successful record of new category introductions, including Outdoor in Spring 2006...and Garden in Spring 2012.” Or, “Our business is seasonal and we have historically realized a higher portion of our net revenues and net income in the second and fourth quarters due primarily to the outdoor selling season in the second fiscal quarter.....”

Combine all of this new activity along with Restoration Hardware’s extensive catalog mailings and strong web presence and this spells c-o-m-p-e-t-i-t-i-o-n. In their prospectus, Restoration says they carry 24 collections of outdoor furniture. In the scheme of things, that isn’t a large selection. I have around 125 different sets on my floor every day. However, these 24 collections are so well targeted at consumers’ taste and income levels that few customers will leave their store with unfulfilled needs.

It would be wrong to assume this is not going to hurt boutique stores like yours and mine. Several weeks ago, a commercial customer came into my store and said they wanted to look at the Restoration Hardware-like furniture. When people start using the brand name Restoration Hardware to label an entire category, we are in deep do-do. It would also be wrong to say Restoration Hardware is going to be a category killer like Home Depot or Office Depot. However, the warnings are there. Listen, can’t you hear the dogs barking at your heels? Woof, woof.

Yours in confused retailing, Bruce