Restoration Hardware Recovers

The company's profit of $1.7 million for the fiscal year that ended Jan. 29 was the fruit of a repositioning plan that Restoration Hardware began in 2001. Although company officials admit that the profit for fiscal 2004 was small, they suggest that it looms as a large accomplishment that bodes better times for a 26–year-old retailing chain that had been struggling with losses, including what many both inside and outside the company called a loss of focus that was hurting both sales and profits. In last week's conference call discussing the fourth quarter and full year results, Restoration president and CEO Gary Friedman commented that the 2004 profit, "may not be a reason for investors to break out the champagne," but "It is a far cry from the $42 million operating loss" that the chain had suffered immediately before embarking on the repositioning plan.

The focus of the repositioning plan has been the launch of a new merchandising strategy, kicked off in April 2002, that included new offerings such as bath faucets, fixtures and textiles, and the remodeling of stores to accommodate the new merchandise. Along with these changes, the company has been refining its supply, inventory control and merchandise return systems. a brand new company since repositioning strategy three years ago. The result thus far is what Friedman terms "a total reconceptualization of the brand and business model" that has turned Restoration Hardware into "a premium home furnishings brand built on a foundation of dominant and predictable core businesses." According to Friedman, one result of the repositioning is that Restoration Hardware has posted "the strongest compounded comparable store sales increases amongst the specialty home retailers in our peer group over the past three years, including a 5.7% increase this past fourth quarter and a 7.8% increase for fiscal 2004."

Part of the repositioning plan has been to eliminate under-performing products in the chain's stores and to reduce the overall number of items in the merchandise assortment, along with closing under-performing stores. As a result, store growth has been flat at Resoration, which ended March with 102 retail stores and two outlet stores in 30 states, the District of Columbia and Canada, compared with 103 stores in 31 states, the District of Columbia and in Canada at Jan. 31, 2004. Nonetheless, there is movement on the store front in the company, which sees promise in its new outlet stores. Patricia McKay, chief financial officer, noted during last week's conference call that the company opened its first outlet store in the fourth quarter of 2004 and plans to open an unspecified number of additional outlet locations to liquidate returned, damaged or discontinued goods. For now, the company has opened one outlet store in suburban Sacramento, CA and will soon open another in the Washington, D.C.-Virginia area.

As McKay explained, the outlet stores initially were designed to take the place of warehouse sales events that Restoration Hardware has traditionally conducted to liquidate damaged, returned or discontinued goods. "As we open additional outlet stores, we expect to eliminate the need to hold separate warehouse sale events, which tend to be less productive," McKay said. Beginning in 2003, Restoration Hardware also began opening a few stores redesigned to showcase its new merchandise. This fall, according to Friedman, "We will remodel or refixture approximately 80% of our stores." Friedman said that the company "won't offer specifics" about the remodelings for competitive reasons, but he did say that they remodelings will be "every bit as dramatic as our repositioning in 2002."

That 2002 repositioning planted the seed for the full-year 2004 profit of $1.7 million, or four cents per share, compared with a net loss of $2.5 million, or eight cents per share, for fiscal 2003. For the fourth quarter of 2004, the chain earned $10.6 million, or 28 cents per share, compared with net income of $8 million, or 21 cents per share, in the previous year's fourth quarter. For the year, net revenue was $525.8 million, a 20% increase versus a year ago. For the fourth quarter, net revenue increased 14% to $187.9 million.