13281 Thu, 12/13/2007 - 6:11pm
By Michael Rudnick
SAN FRANCISCO- A private-equity buyer's deep pockets may be just what Restoration Hardware needs to fix its costly supply chain and ultimately position itself for profitability, analysts said.
Restoration Hardware late last week entered a definitive merger agreement with an affiliate of private-equity firm Catterton Partners.
Catterton may have the same bottom-line growth expectations as some analysts, as its buyout offer of $6.70 per share, or $267 million in total equity, comes at a 150 percent premium to Restoration Hardware's closing share price on the day before the agreement was announced.
"They [Catterton] want to see if they can turn [Restoration Hardware] around with a new capital structure," said Laura Champine, retail analyst with Morgan Keegan & Co. "If they inject it with capital, they might give them more time to turn around."
"We believe this partnership will provide us with important resources to execute our operating and growth strategies over the long term," Gary Friedman, Restoration Hardware's chairman, president and chief executive officer, said in a statement.
The Restoration Hardware deal would be just one more in a slew of private-equity buyouts in the home retail space. The past two years have been marked by notable private acquisitions of such retailers as The Container Store, Dollar General, Michael's Stores, Burlington Coat Factory and Linens 'n Things.
The turnaround would not necessarily be of a sales nature, but more about cost. "The company has shown growth in the top line. It's not a merchandise problem; the problem is turning it [sales] into profits," Champine said.
Restoration Hardware's issues stem from its high-cost supply chain, sources said. Cost relief may be found in possibly moving manufacturing away from Restoration Hardware's proprietary Sacramento, Calif., manufacturing facility; rebuilding some of its distribution centers; cutting down third-party warehousing, which Champine said is at well over 60 facilities; and reducing its number of delivery vendors.
Laura Richardson, retail analyst with BB & T Capital Markets, concurred, saying that Restoration Hardware's cost issues may be eased by "improving its supply chain, order fulfillment, software and processes." She added, "On the catalog side, Restoration Hardware was notorious for orders being incomplete and incorrect," which can ultimately hurt customer relations.
Calls to Chris Newman, Restoration Hardware's chief financial officer, were returned by a company spokeswoman, who referred questions to the merger announcement and statement. Catterton officials did not return calls by press time.
Sources said Restoration Hardware could benefit from the capital of a private-equity firm. A private-equity firm usually has the capital to improve the supply chain, which can affect long-term bottom-line improvement. While supply-chain improvements could lead to longer-term, bottom-line gains, they could result in short-term losses. Private-equity ownership could help cushion these short-term losses and a move away from public markets could enable Restoration Hardware to take losses without the side effect of Wall Street scrutiny.
Restoration Hardware is no stranger to losses, as it has incurred them for the past two fiscal quarters and three of its past five quarters.
Restoration Hardware has already begun to tinker with its supply chain. Efforts to improve distribution and lower costs this year have included the installation of new racking and material-handling equipment in its East and West Coast furniture distribution centers and consolidation of its small package direct-to-customer operations from three distribution centers to one. Over the next year, the company will implement a new warehouse management system and order management system, and open a new distribution center dedicated to small-package direct-to-customer operations and small package retail store distribution in the Eastern and central United States, Friedman said during a second-quarter earnings call.
Restoration Hardware's annual sales have nearly doubled to about $712.8 million in 2006 from about $366.5 million in 2001 when Friedman joined the retailer.
Friedman can be credited for driving a 2004 profit at Restoration Hardware' its first time in the black since going public in 1998. However, the company has been unable to maintain consistent profitability. Despite the bottom-line struggles, Friedman will retain his role, said a Restoration Hardware spokeswoman. The merger announcement states he will "participate with Catterton Partners in the transaction."
"It has been Gary's baby for a long time," Richardson said. "They may want to keep him, because he is the strategic and merchandising force behind the company."
Catterton Partners already has experience in the home as owner of Sleep Innovations Inc.
The merger agreement is subject to shareholder and regulatory approvals, and allows for other bidders up until Dec. 13.