Credit: Shutterstock photoAll bulked up with cavernous stores and an expanded merchandise assortment, Restoration Hardware is building muscle in the hotly competitive home furnishings space.
Restoration Hardware ( RH ), an IBD Leaderboard stock, is undergoing what CEO Gary Friedman calls a "real estate transformation" as it ditches small-format stores and goes in for larger ones, including Full Line Design galleries ranging from around 14,000 to roughly 45,000 square feet of interior space.
The luxury home furnishings retailer is also upping its game on the merchandising front by expanding assortments in categories such as leather, raising the page count of the Source Book catalogs that it mails and adding catalogs in new categories such as rugs.
Restoration Hardware opened its newest and largest Full Line Design Gallery store -- RH Atlanta, The Gallery at the Estate in Buckhead -- on Nov. 21 in time for the holiday shopping season kickoff on Black Friday. The store is the first gallery considered part of its "next generation" fleet.
Very Grand Openings
Nomura Securities analyst Jessica Schoen Mace attended the store's opening event. She also attended the late-October opening bash for the company's Full Line Design Gallery in West Hollywood, its second full-line store in the Los Angeles area.
"The Atlanta and West Hollywood stores look great," said Schoen Mace. "(They offer) a very impressive brand-enhancing and differentiating store experience. A lot of retailers in general are focusing on optimizing their store footprints, which sometimes includes going a little smaller. Restoration Hardware is going in the other direction in (opening) larger stores."
She notes that the six-story Atlanta store, at 45,000 square feet of interior space, compares with 23,000 square feet in the West Hollywood store and 14,000 square feet in its store in the affluent New York City bedroom community of Greenwich, Conn. That one's in a 1917 neoclassical Post Office building on picturesque Greenwich Ave., which is home to its own historic district.
Including the exterior space, the Atlanta store has 70,000 square feet of space. The gigantic store has the "added benefit" of showing a larger portion of existing and new merchandise, says Schoen Mace.
The huge gallery offers a "unique store experience" because of all the products displayed, she says. It features outdoor space including patios, balconies and a roof garden.
Schoen Mace estimates that a full-line gallery can generate two to four times the total sales volume of a Restoration Hardware legacy store in the same market.
The new Atlanta store is "very important because it is the first of its size, and we expect future openings to be closer to this format," she said in a note.
The company has signed leases for eight next-generation Full Line Design Galleries. It has identified and is in negotiations for more than 30 additional locations, said Friedman in a statement announcing second-quarter results in September.
KeyBanc Capital Markets analyst Bradley Thomas says that the typical existing Restoration Hardware store averages between 7,000 and 8,000 square feet, compared with the larger stores at between 15,000 and 30,000 square feet and the Atlanta store at 45,000 square feet of interior space.
Thomas estimates that the company's full-line gallery in Houston -- the firm's only store in the city -- posts at least $40 million in annual revenue. The Atlanta store, which he expects will be Restoration's only store in that city, is twice as big as the Houston store and has an expanded merchandise assortment.
Money In The Making?
Thomas estimates that the Atlanta store can generate revenue of at least $40 million a year, maybe $60 million.
Restoration Hardware's plan, Thomas adds, is to put a full-line gallery in every metro market in the U.S. He sees it having close to 70.
"I think this is a company that could triple its revenue over the next seven to eight years as it transforms the legacy store network into Full Line Design galleries," he said.
In addition to the new Atlanta and West Hollywood stores, the company has full-line galleries in Los Angeles, Indianapolis, Boston, Houston, Greenwich, Conn., and Scottsdale, Ariz.
Meanwhile, Restoration Hardware has been faring well on the financial front.
It's seen at least double-digit earnings growth in all but one of the past nine quarters. In the second quarter, earnings rose 37% to 67 cents a share. Sales increased 14% to $433.8 million. Comparable brand revenue increased 13% vs. a year earlier on top of a 30% increase for the same period in 2013.
Analysts polled by Thomson Reuters see full-year earnings rising 36% to $2.33 a share. They expect a 27% increase in 2015.
Beyond its transformational real estate strategy, Restoration Hardware's success has been driven by its merchandising and merchandise assortment expansion, analysts say.
It debuted 13 Source Books in May vs. last year's spring mailing of six catalogs, says Thomas. The new catalogs totaled over 3,300 pages vs. about 1,600 for last year's spring/summer mailing, he estimates.
"The increase in the page count and number of books is an indication (directionally) of how much they've expanded their product portfolio," Thomas said.
The catalogs included a lot of new products and in some cases new categories, adds Schoen Mace. RH Rugs and RH Leather are among new books it sent in May.
Analysts are upbeat on the company's prospects and its position in the home furnishings market.
"The American consumer is enamored with Restoration Hardware right now," said Thomas. "In high-end home furnishings for the 30-, 40- and 50-year-olds, Restoration Hardware is the 'in' brand right now.
"People really like the style. They're doing a good job of bringing the modern interpretation to many classic designs and being fashion-forward without being wildly unusual. It's building on that success with new products in adjacent categories."
Combined, he adds, these factors are helping to drive same-store sales growth that's been "far better" than the industry for the last four years.
Adds Schoen Mace: "We feel very encouraged by what we see going on and think the runway ahead of them is significant."
She estimates that the company's annual earnings per share will grow in the "high 20% to 30% range" over the next few years.
"These estimates are in part driven by my expectations for the performance of the company's real estate strategy," she said.
Restoration Hardware is part of IBD's Retail-Home Furnishings industry group, which also includes high-end home furnishings retail chainsWilliams-Sonoma ( WSM ) andEthan Allen Interiors ( ETH ).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
