A promising two-timing IPO

Luxury home furnishings retailer Restoration Hardware might have a better go this time.

By InvestorPlace Jul 27, 2012 10:10AM
By Will Ashworth

Luxury home furnishings brand Restoration Hardware is going public in late summer or early fall, exactly a year after initially filing with the SEC. This isn't the first time it's gone public. In June 1998, it sold 3.3 million shares at $19 for net proceeds to the company of $47.8 million. Last time it traded on the NASDAQ; this time it's going on the NYSE.

Depending on how this is priced, it should be a very interesting IPO.

Restoration Hardware has had a colorful history to say the least. It was founded in 1980 by Stephen Gordon in Eureka, Calif. Gordon got the idea while renovating his Queen Anne Victorian house and finding it hard to locate authentic period hardware like door knobs and all those things that make a house a home. The first store was his renovated house.

Business began to take off. By the time of its IPO in 1998, Restoration Hardware had 47 stores open and 93 by January 2000. While it was growing in terms of the number of stores, its profitability was taking a beating.

In its fiscal year prior to its IPO, earnings before income taxes was $3.1 million on revenue of $97.9 million. Not bad. Then in March 1998 (prior to IPO) it acquired Michael's Concepts In Wood (a supplier) for $5.4 million. That sent revenues into the stratosphere, more than doubling them to $209.4 million in fiscal 1998.

Unfortunately, the wheels fell off the next year, when it lost $4.8 million on $295 million in revenue. Restoration Hardware went on to accumulate losses of $61 million over the next four fiscal years. Gary Friedman (current co-CEO), who first came to company in March 2001 after being passed over for the CEO job at Williams-Sonoma (WSM), couldn't do much with the business because its inventory system was a disaster. It clearly grew too fast with too little talent to operate it successfully.

Gordon finally resigned in January 2005 to run Robert Redford's Sundance Catalog. It was an end of an era.

Flash forward to 2008, and private equity firm Catterton Partners acquired Restoration Hardware for $179 million to complete -- without the noise of the markets -- the work Gary Friedman started to transform the company into a luxury home furnishings business.

The Wall Street Journal ran a great article in May about Friedman and the transformation. If you're the slightest bit interested in this IPO, you should read it. When Catterton originally filed the registration, it said it was looking to raise $150 million. Although IPO markets have been very uncertain in recent months, thanks to the Facebook (FB) debacle, consumer-oriented companies like Annie's (BNNY) and Michael Kors (KORS) have done well, with average first-day returns of 40.7% compared to 16.6% for the entire U.S. IPO market.

Given this success, I'd expect the eventual amount of money raised to be higher. It's likely that Catterton and company will receive enough from the IPO proceeds to recover its entire investment -- with plenty of profit still to be made from a possible secondary offering and the end of the 90-day lock-up restrictions.

They're going to make out like bandits because co-CEOs Friedman and Carlos Alberini, who came from Guess (GES) in June 2010, have done an excellent job revitalizing the brand. In its boldest move yet, Restoration Hardware is opening stores that are 21,500 square feet, providing three times the selling square footage of its existing stores.

In 2011, it opened the first two of these stores in Los Angeles and Houston, closing existing stores in both cities to focus on its new concept. Additional stores will soon open in Scottsdale, Ariz., Boston and Atlanta, with New York and Chicago not too far in the future.

The execs are playing for keeps, and the design community is definitely taking notice. While it might seem like a big jump for a company with a checkered past, it's the right move. With profitability and operational efficiency at their highest point in the company's history, Restoration Hardware is now in the best position to be successful.

I like where this business is headed. If it comes to market with an IPO valuation similar to Ethan Allen (ETH) at one times revenue and a market cap of $1 billion, I'd definitely find it attractive. Anything more than that is excessive.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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