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Restoration Hardware doubled-down on old-school retail and lost

·Markets Correspondent
Source: Wikipedia

The last man standing when it comes to the success of brick and mortar retailing may have just fallen.

Restoration Hardware (RH)—which has doubled down on large store formats and oversized printed catalogues in the last few years—dropped 20% on Thursday after the company’s disappointing first quarter report.


Chairman and CEO Gary Friedman said in the company’s news release statement that concerns were short-term in nature.

“Our near term business performance is being pressured by the continued headwinds in the markets impacted by energy and currency, as well as a general slowdown in the luxury consumer market,” he said in the company’s press release. “In addition, the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and a more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to negatively impact our fiscal 2016.”

But analysts aren’t sold. Deutsche Bank’s Adam Sindler downgraded the stock, questioning his own original conviction in the long-term business model.

“We had believed the current issues were cyclical in nature and not structural, and believed that investors would again start to look longer term later in 2016 as compares got easier and as RH was potentially working through these cyclical issues,” Sindler said. “We simply believe there are too many moving parts in the near-term that will apply pressure over the next several quarters.”

The company’s meaningful 35 to 40% cut to the 2015 earnings guidance provided just two months ago adds further question marks around the future of the business.

As much of retail has worked to rationalize store count, Restoration Hardware had doubled down on its real estate strategy.

“On average, our legacy retail stores display less than 10% of our current product assortment. Our next generation Design Galleries allow us to optimize our selling space by displaying a greater percentage of our merchandise assortment,” according to the company’s annual report.

The company is targeting a range of 25,000 to 60,000 leased selling square feet for new locations, compared with about 8,000 square feet for its legacy Gallery format. The company, which remains in early stages of opening its new gallery stores, plans to operate 60 to 70 locations of these new design galleries in the United States and Canada.

It has also focused on in-depth catalogues, known as Source Books.

“Our Source Books, which showcase nearly our entire product assortment, are one of our primary branding and advertising vehicles,” according to the annual report. “We have found that when we display a greater merchandise assortment in our Source Books, we experience increased sales across all of our channels. As in our retail stores, our Source Books present our merchandise in lifestyle settings that reflect our unique design aesthetic.”

Retailers from Macy’s (M) to Nordstrom (JWN) and The Gap (GPS) have reported declining traffic. And even L Brand (LB), which had been bucking the trends with strong traffic figures for its Victoria’s Secret stores, has declined significantly this year following negative comparable store sales.

Even the housing-related retailers—including Home Depot (HD) have outperformed by integrating their online and in-store channels.

The future of retail remains unclear. Even on Thursday after the close, Urban Outfitters (URBN)—which was one of the positive outliers in this past quarter's dismal earnings season—announced that so far during the second quarter, comparable store sales are mid single-digit negative. At least for now, Restoration Hardware's strategy doesn't seem to be paying dividends.