Restoration Hardware is a retailer of furniture, hardware, and home accessories such as bathroom fixtures and decorative furnishings. The company is based in California; it started operations in 1979 and incorporated in 1987. The company sells through multiple channels: a network of 103 retail stores and six outlet stores across the United States and Canada, a print mail-order catalog, and its Web site. Restoration Hardware is a major player in an industry that includes competitors such as Pottery Barn, Pier 1, and Williams Sonoma. Restoration employs 3,800 workers, 1,600 of those full-time.
Restoration's business strategy puts the company in a unique sector of the marketplace. Restoration focused from the start on merchandise that honors classic America. The company's original furniture and fixtures were designed to match the d'cor and form of older houses. Today, when you walk into a Restoration Hardware store, the merchandise clearly evokes images of the past. Many products, such as portable record players or wooden toys, are intent on inspiring feelings of tradition, if not nostalgia, in older generations of customers. The younger generations may recognize these products from reruns of old television shows and movies set in the times of their parents and grandparents. Many of these products are difficult to find elsewhere and they are very appealing. Up front, the company knows what it wants to do and has maintained a consistent vision. According to Ed Weller, an analyst at ThinkEquity Partners, "When you go to the stores, it's clear that Restoration Hardware has something customers want." Many of Restoration's top executives come from merchandising backgrounds. A significant portion of Restoration's revenue stream comes from its direct-to-customer ventures. Circulation of the mail-order catalog increased by 1 percent in 2005, with 61 percent of the catalogs earmarked for past customers. The catalog itself increased in terms of pages with 19 percent more catalog pages than in 2004. Mail-order catalog and Web site operations (direct-to-customer) saw substantial revenue gains of 75 percent in 2004 and 34 percent in 2005. In recent years, the company has improved its e-commerce software, increasing its capacity to support simultaneous online shoppers by 8,000 percent. This upgrade to Art Technology Group's e-commerce software is just one of several technology investments that Restoration has made in its Web site. In late 2003, Restoration brought in iPhrase Technologies to implement its One Step natural language search and navigation software as a replacement for RestorationHardware.com's keyword-oriented product search facility. The new search technology has made the Web site more user-friendly. Restoration also employed testing and merchandising tools from Offermatica to improve the usability of the Web site. The tools boosted the company's revenue per visitor rate and resulted in a 267 percent ROI over the duration of the implementation. In March 2004, Scene7, Inc., a provider of dynamic imaging software, announced that Restoration Hardware had adopted Scene7's eCatalog solution for its online print catalog. Restoration now outsources the entire process of publishing and hosting its print catalog on the Web. Restoration only has to provide Scene7 with the print catalog in Portable Document Format (PDF) format. The published Web catalog includes dynamic links from areas on each catalog page to corresponding product pages on the Restoration Hardware Web site. Scene7's eCatalog solution has also made it possible to implement advanced image-viewing features such as panning, zooming, and rollover product descriptions. Additionally, customers can now use a "colorizer" feature to change the fabric style on any upholstered product that they are viewing. Such technology saves Restoration from the enormous expenses that would accompany studio photography of all the different combinations of fabric and furniture. According to Scene7, its eCatalog solution has resulted in the doubling of Restoration Hardware's conversion rate of browsers to buyers. Despite a strong product line and upward growth in sales, Restoration has not been able to make money. By the end of 2003 the company posted a $2.9 million net loss down from $3.9 million the previous year. The year 2003 was the fifth straight year the company did not turn a profit. For the fiscal year 2004, Restoration finally posted a net gain of $1.7 million, only to fall back into the red with a $29 million net loss in 2005. Analysts point to the less-visible aspects of Restoration's business, specifically its supply chain management systems and technology infrastructure, as profit drains. Russell Hoss, a Roth Capital Partners analyst, states that Restoration simply does not "know how to make money." Good products alone do not guarantee success. Retail businesses need to juggle an extraordinarily complex system of variables to meet their expectations of success. The analysts contend that Restoration Hardware is failing to control these variables to the best of its ability. Among the greatest concerns is Restoration's ability to keep its inventory in line with customer demand. Over the 2003 holiday shopping season, same-store sales figures for Restoration experienced a drop of 3.5 percent from the previous year's holiday season. One of the biggest culprits was a line of couches and chairs that shoppers can customize by choosing from a selection of 50 fabric styles, with delivery promised within 8 to 10 weeks. High demand of the most popular styles set off a chain reaction of profit-draining events. Customers had to wait longer than they had been told initially to receive their couches and chairs. In some cases, the customers simply canceled their orders. Other customers chose to purchase less-popular styles instead, with the incentive of a discounted price. Some of the orders that customers did not cancel could not be fulfilled in time to count in the holiday season sales figures. In the last few years, Restoration has implemented a repositioning plan, which involves reducing the company's debt, upgrading management, weeding out poor products from the product line, and closing stores that aren't performing. Additionally, the company has introduced new products and remodeled its retail locations. The plan does not address improvements to the company's aging information technology (IT) infrastructure. Restoration Hardware stores use point-of-sale equipment that is 10 years old. The equipment lacks the capability to process debit card purchases without a physical signature, nor can it automate processes such as checking fabric stocks when a customer makes a request for a custom furniture order. Customers placing custom furniture orders must fill out a paper form that includes their fabric selection. Then a salesperson must call Michael's Furniture (which manufactures Restoration's furniture) in Sacramento, California, to see what is in stock. A system polls Restoration stores nightly to aggregate sales, inventory, and pricing data to provide information that can help managers fine-tune the company's merchandise assortments. However, the system is not capable of providing demand forecasting. Restoration has systems to support "smooth warehouse operations in a multi-warehouse environment" consisting of three warehouses in California and one in Baltimore. Restoration Hardware's most recent annual report on Form 10-K for the U.S. Securities and Exchange Commission states that the company relies on a single vendor for its point-of-sale, merchandise management, and warehouse management systems, along with the software support required to maintain these systems. Restoration purchased these systems and services from STS Systems, which has since become part of NSB Group, in the mid-1990s. NSB's most recent version of its warehouse-management system is far more advanced than the version that Restoration continues to use, with capabilities for XML-enabled processing of advance shipping notices and real-time task tracking. Upgrades to the older version of the system are covered by Restoration's service agreement with NSB, but Restoration has not taken advantage of the new technology. The company has also not improved its systems for restocking its products once they have been distributed from the various warehouses. Statistics show that in areas such as frequency of inventory turnover and gross profit margin, Restoration trails its competitors. The most recent statistical ratios show that Restoration's inventory turnover rate is 2.25, compared to 3.54 at Williams Sonoma. Restoration's gross profit margin is only 35 percent, putting it among the lowest-category performers for its industry. Restoration's annual report paints a picture of a complex business environment that is vulnerable to a host of trends, restrictions, and abnormalities. From a competition standpoint, Restoration's offerings place it in the same realm as specialty stores, traditional furniture stores, and department stores. At stake are customers, viable store locations, suppliers, and personnel. Restoration asserts that many of its competitors have greater financial, marketing, and operational resources, for obtaining these assets, and that such hearty competition puts its financial performance and future success at risk. To stay in the race Restoration believes that the company should focus on fortifying its management, improving and increasing its product line, improving customer service, enhancing its presentation of merchandise, and maintaining competitive pricing and retail locations. The report goes on to say, "Our success is highly dependent on improvements in our planning, order acceptance and fulfillment and supply chain process," and, "An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain. . . . An inability to improve our planning and supply chain processes or to take full advantage of supply chain opportunities could result in loss of potential sales revenue, increase our costs and have a material effect on our operating results." The company must also be able to better anticipate consumer trends. Restoration does not speculate on how successful it will be at implementing these improvements or offer any specific plans for doing so. The one thing that Restoration Hardware does seem sure of is the litany of factors that could undermine its future success. These include seasonal fluctuations in revenue (including a dependence on peak sales and earnings from the fourth-quarter holiday season), dependence on vendors to supply merchandise and services, disruptions in distribution to stores from its warehouses, labor strife, dependence on external funding, trade restrictions and currency fluctuations associated with foreign imports and purchases, general economic conditions, and the negative impacts on business of war and threats of terrorism. Each of these factors has its own set of variables that adds to the unpredictability of running a retail business. For example, Restoration acquires its merchandise from a pool of over 400 vendors. However, Restoration does not have long-term purchase contracts with its vendors. Therefore, the company has no guarantee that it can continue to acquire the merchandise that it intends to market in the proper quantities, at the appropriate cost, or at all. Additionally, many vendors must have purchase orders submitted well in advance of when Restoration wants to move its inventory to the shelves of its stores. This long lead time leaves the company without the ability to respond to sales trends, which is especially risky during the holiday season, when Restoration also spends more money on marketing and personnel. The company expects to hit certain sales highs during the holidays. Failure to do so as a result of insufficient inventory or a miscalculation of what products will appeal to shoppers can have significant negative impact on the health of the business. Restoration purchased 62 percent of its merchandise from foreign vendors in 2005 and the company expects the percentage of foreign goods to rise in the future. Importing goods adds another layer of risk factors for the business. Tariffs, quotas, trade relations and restrictions, political unrest, shipping costs, exchange rates, and other variables all mitigate Restoration's ability to maximize the efficiency of its supply chain. The company must weigh the risks involved with importing merchandise against the benefits, such as cheaper goods and the availability of products that cannot be purchased anywhere else. Restoration's report even points out that its thriving direct-to-customer operations may not sustain its current level of profitability. Decreased performance by those departments could be detrimental to the profitability of the business as a whole. Even though Restoration has placed great emphasis on upgrading the direct-to-customer operations, they remain as vulnerable to risk factors as the rest of the business does. In 2006, Netezza Corporation and its partner QuaniSense completed a 100-day implementation of their retail business intelligence solution for Restoration Hardware. The implemenation promised to give Restoration a single view of critical business information with the ability to drill down into its multi-channel operations. The solution provides comprehensive analysis of merchandise, inventory, and sales data. Although a business such as Restoration Hardware faces numerous obstacles in operating to a profit, many of those outlined by the company are speculation or worst-case scenarios. Nevertheless, a consistent increase in revenues that isn't accompanied by profitability is clear evidence of a problem that needs attention. Sources: Larry Dignan, "Restoration Project," Baseline Magazine, February 2004; Restoration Hardware 10-K Report for the Fiscal Year Ending January 28, 2006, www.restorationhardware.com; "Restoration Hardware Deploys Retail Business Intelligence Solution from Netezza and QuantiSense," www.netezza.com, January 16, 2006; "Restoration Hardware: Testing Brings 267% ROI (and 5 Important Lessons)", www.offermatica.com, accessed December 28, 2006; Rick Aristotle Munarriz, "Faith Restoration Hardware," www.fool.com; "Restoration Hardware," Corporate Design Foundation, www.cdf.org, accessed April 20, 2004; "Restoration Hardware Increases Conversion Rates Using Scene7's eCatalog e-Merchandising Solutions," www.scene7.com/news, accessed March 23, 2004; "Restoration Hardware Reports Mixed Annual Results," Home Channel News, March 19, 2004; "Financial Reports: Direct Business Soars at Restoration Hardware," Catalog Age, March 24, 2004; "Hardware Chain Makes Progress on Restoration," San Francisco Business Times, March 18, 2004; sand "Restoration Hardware Utilizes iPhrase to Drive Sales and Provide Industry-Leading Self-Service Shopping Experience," Internet Retailer, December 1, 2003.
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