IPO Preview: Restoration Hardware

| About: Restoration Hardware (RH)

Based in Corte Madera, CA, Restoration Hardware (NYSE:RH) scheduled a $120 million IPO with a market capitalization of $851 million at a price range mid-point of $23 for Friday, November 2, 2012.

Before Sandy, seven IPOs were scheduled for the week of October 29th. Three have been pushed back to next week. The full IPO calendar is available here.

S-1 filed October 23, 2012.

Manager, Joint Managers: BofA Merrill Lynch/ Goldman, Sachs & Co.
Co Managers: Baird; William Blair; Piper Jaffray; Stifel Nicolaus Weisel

RH is an high end furniture and accessories retailer undergoing a business transformation (see below). Revenue was up 23% to $958 million for the year ended January 2012 vs 2011. Profits increased to $21 million from a loss of $7 million.

For the six months ended July 2012 revenue increased 43% to $511 million from $420 million. Profits increased to $14 million from $1 million.

There is a management issue. The founder, Chairman and co-CEO was recently asked to leave, see below. However, the other co-CEO should be able to handle the CEO duties.

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IPOdesktop believes RH will increase form its IPO price because of the upward momentum in sales & earnings, because of the ongoing successful transformation and because RH is branded in the consumer marketplace.

RH's former Chairman and Co-Chief Executive Officer, Gary Friedman, recently resigned from these positions and as a director of the Company following an investigation by a special committee of non-management directors of the board assisted by independent counsel prompted by disclosure that Mr. Friedman and a Company employee were engaged in a personal relationship, described by the parties as consensual.

RH believes that Mr. Alberini, the current sole Chief Executive Officer, and the other management team members can continue to effectively lead the Company, and RH expects to benefit from Mr. Friedman's contributions as an advisor and board observer.

RH believes it is one of the fastest growing and most innovative luxury brands in the home furnishings marketplace.

RH offers merchandise assortments across a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor, garden, and baby and child products.

RH's business is fully integrated across multiple channels of distribution, consisting of stores, catalogs and websites. RH positions its stores as showrooms for the brand, while catalogs and websites act as virtual extensions of the stores.

As of July 28, 2012, RH operated 71 Galleries, 2 full line Design Galleries and 10 outlet stores throughout the United States and Canada. In fiscal 2011, RH distributed approximately 26.1 million catalogs, and RH websites logged over 14.3 million unique visits.

RH is in the process of an ongoing major transformation of its business characterized by a period of rapid growth and a large number of new business initiatives.

For example, RH recently developed a full line Design Gallery format which involves larger store square footage. RH plans to continue to open full line Design Galleries in select major metropolitan markets and expects to close a number of the older stores and replace them with the full line Design Gallery format.

RH is currently contemplating other new product lines and extensions, as well as expanding sales to international markets.

In addition, RH is continuing a number of new initiatives in other areas of the business, including product sourcing and distribution and management information systems.

For example, RH recently reduced the use of third-party buying agents in most foreign locations. In addition, RH has significantly expanded the page counts of catalogs, increased the number of households receiving the catalogs and reduced the number of catalog mailings.

RH historically has realized, and expects to continue to realize, higher net revenue and profitability in the fourth quarter of the fiscal year due to the holiday selling season and to a lesser extent in the second quarter due to the outdoor selling season.

In fiscal 2011, RH recorded net revenues of $235.6 million and $305.2 million in the second and fourth fiscal quarters or 24.6% and 31.9%, respectively, of fiscal 2011 net revenue. In fiscal 2011, the gross profit for the second and fourth quarters was $91.2 million and $117.5 million or 25.6% and 33.0% of the fiscal 2011 gross profit, respectively.

Home Holdings, LLC , 100%, which is comprised of the following:
. Catterton, 36.7%
. Tower Three, 34.6%
. Glenhill, 10.1%
. Gary Friedman, 17.6%

RH competes against a large number of independent retailers that provide unique items and custom-designed product offerings at high price points, including antique dealers and home furnishings retailers who market to the interior design community.

RH also competes with national and regional home furnishings retailers and department stores, as well as mail order catalogs focused on home furnishings.

Other home retailers include Williams-Sonoma (NYSE:WSM), Ethan Allen Interiors (NYSE:ETH) and Bed Bath & Beyond (NASDAQ:BBBY), but there appears to be no available apples vs apples comparison.

As of July 28, 2012, RH had 2,900 employees, of which 1,000 were part-time employees.

RH expects to net $86 million from the sale of 4.8 million shares. Stockholders expect to sell 400,000 shares. Proceeds are allocated as follows:

$85.7 million of the net proceeds to repay a portion of the outstanding amounts under the Restoration Hardware, Inc. revolving line of credit and term loan.

$7.0 million to pay management fees to affiliates of Catterton, Tower Three and Glenhill pursuant to the terms of the management services agreement that will terminate upon consummation of this offering.

$8.4 million of available cash to further reduce amounts outstanding under Restoration Hardware, Inc.'s revolving line of credit and term loan.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.