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Furniture polish

31 Oct 2012 By Jeffrey Goldfarb

Restoration Hardware is putting the finishing touches to a beautiful financial renovation. The upscale U.S. home furnishings retailer went private in June 2008 and managed to thrive during the crisis. Now it is set to return to public markets and is offering investors a rare opportunity: luxury at a reasonable price.

The turnaround story is an implausible one. With consumers reeling or hunting for bargains, Restoration under private equity ownership went in the other direction. It stocked polished aluminum aviator wing desks and 802-gram Turkish towels while mailing thousands of hulking catalogs easily mistaken for coffee-table books. Despite closing 21 of its 95 stores between roughly 2009 and 2011, revenue increased by 50 percent.

The real estate recovery and increasing appeal of luxury goods should be a further boon for Restoration. Future profit is hard to gauge, though, because of the company’s considerable operating leverage in recent years. Consultant Bain & Co. also forecasts sales growth in the high-end design and furniture market will slow to just 3 percent. But if Restoration’s net income jumps by half over the next 12 months, the company would be worth about 17 times earnings at $23 a share, the midpoint of its current price range.

Williams-Sonoma, owner of its eponymous high-end kitchenware chain as well as furniture retailers Pottery Barn and West Elm, trades at a slightly richer multiple. Looked at another way, though, Restoration would get a premium. It plans to use its sale proceeds to pay down over half its debt. That would leave Restoration’s enterprise valued at some $900 million, which makes for a multiple of 10 times EBITDA, assuming that measure of profit were to grow at the same rate in the coming 12 months as the last 12. Williams-Sonoma’s enterprise multiple, meanwhile, is just above eight times EBITDA.

A big unknown, though, will be the effect of the resignation in August of Gary Friedman, the chairman, co-chief executive and public face of the brand, because of a personal relationship with an employee. He remains a creative consultant and, curiously, in line for a potentially hefty incentive bonus based on the company’s market value. The whole episode is a blemish on Restoration’s restoration. For the most part, though, the company is a sight to behold.


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