This Retail Model Just Might Be Crazy Enough To Work As Converts Mount

December 06, 2017

RH (RH), the luxury furniture company formerly known as Restoration Hardware, is a bit of an oddity, by retail standards.

 "By the end of last year, we had 32 marriage proposals in the café at the 3 Arts Club in Chicago," RH CEO Gary Friedman bragged to analysts on the earnings call late Tuesday. "Thirty-two marriage proposals in the middle of a furniture store. You can't make that up, right?"

He's talking about RH's massive, chandelier-heavy, 70,000-square-foot "design gallery" in Chicago, which opened in 2015 and includes five floors of showrooms. It was the first such gallery to include a restaurant — a concept Friedman intends to expand, even as other retailers consolidate and shutter storefronts en masse.

The unusual retail model is arguably the opposite of e-commerce star Amazon (AMZN), as RH focuses on brick-and-mortar stores and in-person services, and has a penchant for 17-pound print catalogs. (Even without much of a social network presence, its 3 Arts Club is also the 7th most-Instagrammed cafe in the U.S., according to Instagram.)

And unlike its retail peers, RH has nixed discounting in favor of a $100 annual membership program that it says has smoothed over issues with returns. In addition to becoming a restaurateur, Friedman has also embraced the interior design business.

"Investments in our RH Interior Design business, a key benefit of membership, continues to evolve the brand from creating and selling products to conceptualizing and selling spaces, deepening our relationship with customers, and positioning RH as the leading luxury interior design platform in the country," said Friedman in the earnings release.

It's contrarian, for sure. But is it working?

"After a challenging 18 month business transformation, RH has clearly regained its sales momentum and is executing at a higher level, illustrated by its solid F3Q17 results and forward outlook," wrote Raymond James analyst Budd Bugatch, adding that he remains a fan of RH's long-term growth strategy to open more brick-and-mortar design galleries.

"(We) agree with CEO Friedman that with the addition of hospitality in its (full-line design galleries), the company is creating a shopping experience that is difficult, if not impossible, to recreate online."

Shares of RH rose 0.8% to 104.69 on the stock market today and hit a new high of 109.53 intraday, after diving as much as 8% earlier in the day. Williams-Sonoma (WSM) dipped 0.7%. Amazon added 0.9%.

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Late Tuesday, RH said third-quarter profits more than quintupled to $1.04, in line with estimates, while revenue of $592.5 million fell short of forecasts but matched the company's recently raised guidance. The seller of $7,000 dining tables and $1,300 cribs clocked a 6% jump in same-store sales growth during the quarter, better than the 5.6% gain Consensus Metrix had expected.

Friedman believes his galleries can "double our retail sales in every market." Going forward, RH is looking abroad, as it envisions the possibilities of a gallery-restaurant in London.

"We were looking at a gallery in London — it wasn't really about a gallery location in London, it was really about the launch of RH international, right?" said Friedman on the call. "Because one gallery in London with our direct platform and capabilities really reaches for the most part a lot of key wealth in Europe, because everybody interacts with London, right?"