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Earnings falling, Restoration Hardware gets confidential with Sears    

Corte Madera, Calif. – On the eve of reporting disappointing third-quarter earning results -- a net loss of $15.2 million – home furnishings specialty retailer Restoration Hardware (RH) entered into a confidentiality agreement with Sears Holdings, granting access to non-public information on the company.

Under the terms of its standing merger agreement with investment group Catterton Partners (acting via its Home Holdings entity), Thursday, Dec. 13 is the last day that RH will solicit competing proposals for a third-party transaction.

In a Dec. 7 SEC filing, RH said it “expects that Sears will be asked to submit a proposal as part of this process.”

Meanwhile Restoration reported a fully diluted net loss more than twice that of a year ago, or $0.39 per share vs. $0.15 per share – noting that $0.04 of the most recent loss was “related to costs associated with the merger agreement.”

While sales grew 10.6% to $173.7 million in the quarter, president and ceo Gary Friedman noted that “high ticket durable categories” in particular were affected by “weakening consumer spending and traffic levels.”

In its continuing shift of emphasis from stores to direct sales, RH said that direct-to-consumer revenues made up 56% of total revenues for the quarter, up from 36% in the year-ago period. SG&A costs are higher in its direct division, and partly as a result of that, overall SG&A costs zoomed up 410 basis points to 40.8% of sales. Gross profit margin slipped 90 basis points to 33.4% of sales.

RH will not hold a quarterly conference call, due to its pending merger/acquisition developments. For the same reason, the company has withdrawn prior guidance and will not provide guidance for either fourth quarter or full year results.

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