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Restoration Restores Profits

Cecile Corral, Retail Editor 2 -- Home Textiles Today, April 4, 2005

Corte Madera, Calif. — Coming off its first profitable year since going public in 1998, Restoration Hardware said it will continue to evolve the brand, launching a major reconfiguration of most of its units this fall with greater emphasis on its key categories.

During the company's fourth quarter and year-end results call last week, Gary Friedman, acting chairman, president and CEO, said those key categories were textiles, furniture and lighting.

About 80 percent of Restoration's stores will be remodeled and re-fixtured and, “You'll see innovative ideas as they relate to merchandising of all of our core businesses,” Friedman said.

While the company said it would not offer specifics regarding the upcoming in-store changes citing competitive reasons, Friedman said it should be “every bit as dramatic” as the first phase of the retailer's repositioning initiative in 2002.

“The model we have planned for our core categories, the point of view that we'll play this fall, will well-position our brand,” he continued. “In the businesses we're in, we believe we're going to have the number one ranking in probably six out of the eight categories we compete in, and the number two ranking in the other two categories.”

This next evolution of the Restoration brand is also expected to create a higher merchandise margin model “as we edit lower margin, non-synergistic categories and items,” said Friedman. He noted that the company has no plans of adding any new categories any time soon.

“These moves will have the greatest positive impact in the first through third quarters, and we are currently forecasting fourth quarter comps to be flat to slightly negative,” he added. “We do plan on achieving a significant increase in profitability in the fourth quarter due to less seasonal markdowns and much higher merchandise margins.”

For fiscal 2004, Restoration reported an operating profit of $4 million, which Friedman said was small but showed the store had momentum going forward.

“While it may not be a reason for investors to break out the champagne, it is a far cry from the $42 million operating loss or the $24 million net of one-time write offs when we started this journey,” he said.

Fourth quarter and fiscal year results including the following: net revenue up 14 percent to $187.9 million for the fourth quarter; comparable-store sales up 5.7 percent for the quarter, which reflects a holiday comp-sales increase of 3.1 percent and a January comp-sales increase of 20.7 percent; direct-to-customer revenue up 51 percent to $40.1 million for the quarter; operating earnings were $17.2 million for the quarter, up 23 percent; net income for the fourth quarter was $10.6 million compared to $8 million for the prior year; and full year net income was $1.7 million compared to a net loss of $2.5 million.

Fourth quarter numbers, “reflect customers' positive responses to our offerings both during the holidays and in the post period when we anniversaried our now-annual bath event,” said Patricia McKay, executive vice president and chief financial officer.

Added Friedman, “Restoration Hardware now operates as a fully vertically integrated retailer, controlling our product from concept to customer.”

Another growth area for the year was direct imports, which went from 15 percent to more than 50 percent, “enabling us to improve our merchandise margins year over year,” Friedman said.

His goal is for Restoration's direct import rate to reach 75 to 80 percent. “We have another 5 to 10 points to go still, but not more than that,” he said.

Regarding real estate, one new unit is scheduled to open this year during the third quarter, and no store closures are expected.

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