RH Ahead of Wall Street Transforming an Industry

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In late December, I had two out-of-this-world experiences. Out of this world, but into the universe created by RH CEO, Gary Friedman. The first experience was among the thousand-plus Champagne drinking celebrators attending the opening of The RH Gallery at Easton Town Center in Columbus, Ohio. The second was a deep immersion into the world of Gary Friedman.

The opening was the launch of museum-quality RH Galleries, housing upscale furnishings. There are now about 70 Galleries across the US. A little over a year ago, Warren Shoulberg, a regular contributor to The Robin Report and an expert in the home space, covered the RH gallery opening in New York City citing ten things that RH does that proves physical retailing works.

Here\’s what happened in New York City, as reported by Shoulberg: \”At 90,000 square feet and six stories, the new RH Gallery location in Manhattan\’s trendy Meatpacking District does more than just dominate the neighborhood landscape. It also dominates the retail landscape as a model for what companies across the entire retailing spectrum need to do to stay vibrant, prosperous and above all, relevant to a customer base increasingly picky about where they shop. The new location, \’don\’t you dare call it a flagship…much less a store, says CEO Gary Friedman,\’ is the continuation of the company\’s ongoing reinvention and reformation as the leader of the home furnishings pact.\”

[callout]Friedman is unique and complex…surreal, a philosopher, an uber-character, an energizer bunny, a stream-of-conscious rambling brilliant visionary; a bit nutty, but, unstoppable until he hits a wall traveling at the speed of light – which is rarely.[/callout]

I will double-down and emphasize how this new vision is a call to action to all retailers with this quote from CEO Friedman: \”RH Columbus reflects our vision to create architecturally inspiring spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality -spaces that activate all of the senses and create an immersive experience that cannot be replicated online.\”

There\’s that keyword again: \”experience.\” I will expand on Friedman\’s philosophical and revolutionary vision. But first, let\’s step back for a minute and check out how his \”out of this world\” experience\” evolved.

Up and Down to the Turnaround — and Warren Buffet Weighs In

The legendary and arguably one of the most successful investors in the world, Warren Buffet, recently placed a bet that RH\’s success is sustainable by reporting a new position of 1.2 million RH shares.

This might be due to RH\’s incredible turnaround from an initial gamble that Friedman took in 2008 at the bottom of the Great Recession. At the time, Restoration Hardware was bleeding and then it soared to its recent incredible surge between 2017 and its current 2019 Q3 results.

In 2008, Friedman teamed up with private equity firm Catterton Partners to take the company private for a reported $175 million. And the gamble, as stated by Warren Shoulberg, \”was opening what was to be the first predecessor to its current Gallery format. It remodeled and remerchandised its existing Flatiron District store at 5th Avenue and 22nd Street in New York City. Though it was still smaller than today\’s Galleries, it was its first store to reflect the upscale, aspirational furniture-focused format Friedman was envisioning as fundamentally repositioning Restoration Hardware. Essentially, it replaced the hardware tchotchkes and bad mission furniture Restoration Hardware had been selling. He had yet to rename the company RH, but this was the first step in the process to today\’s sumptuous lifestyle experience.\”

Friedman was quoted at the time, \”…If we\’re going to go bankrupt, we\’re going to do it in style.\”

Well, he didn\’t go bankrupt, however, according to Shoulberg, \”the stock and the company\’s financial performance were all over the place during the period between 2008 and 2017. There were wild swings in both, impacted by high SG&A, bad inventory management and the costs associated with the merchandise changeover. It really hasn\’t been until the past two years that the company has started to put up consistent positive numbers and Wall Street has gotten behind it.\”

The Brave March Forward

In 2016, RH hit another low following a rollout of a bad line and severe distribution problems. By February 2017 the stock had plummeted to $24, dropping 77 percent from its high in November of 2015. However, undeterred, Friedman told his employees during an April leadership conference, \”We have to be willing to march through hell for a heavenly cause,\” (a \”Gary-ism,\” as I now call his never-ending stream of boldly stated dictums).

They did march through hell, cleaned up the mess, and sprinted forward creating Friedman\’s vision. And the gamble of essentially upending the traditional furniture store model finally gained traction and led to its now super 2019 Q3 earnings report.

By the end of the 2017 fiscal year in February 2018, sales had increased 14 percent to $2.44 billion. And in the third quarter of 2018, adjusted net income jumped 92 percent from the prior year to $46.8 million. As night follows day, RH\’s share price quintupled from their low to end 2018 at $120.

Now the 2019, Q3 results powered by an apparent rocket fuel propellant, show a revenue rise of 6 percent to $677.5 million, with adjusted EPS jumping 74 percent to $2.79, (both above Wall Street estimates). Accordingly, RH stock soared to a record high. As of this writing, it\’s $222 per share, (compare this to $24 per share just two years ago). RH expects to open five new Galleries and one Guesthouse in fiscal 2020 and plans to boost Gallery openings to five to seven per year, with a long-term revenue growth goal of 8-12 percent, with net income growth of 15-20 percent. As Friedman explains, \”While Wall Street tends to reward duplication, we believe real value is driven by innovation.\”

What\’s Ralph Got to Do with It?

Upon boarding the RH jet heading back to New York from Columbus (another out-of-this-world Friedman experience), I sat across from Gary and learned the jet was pre-owned by Ralph Lauren, (the interior designed in the Gatsby-like Ralph Lauren style) and it struck me that the magnificent, almost museum/mansion-like Gallery opening I just experienced, also had a \”Gatsby-esque\” style.

Friedman thinks big and stylish, and his quest is to revolutionize physical retailing. The Columbus Gallery takes a page from the hospitality industry with its glass-encased Rooftop Restaurant and Wine & Barista Bar that open onto a landscaped park. On three levels and 60,000 square feet of indoor and outdoor space, the new Gallery features artistic vignettes of luxury home furnishings. There are also full floors of RH Interiors, Modern and Outdoor. And it includes an in-house Interior Design Firm & Atelier.

RH describes its concept as a \”transparent, multi-level contemporary structure filled with fresh air and natural light. The Gallery features a charcoal grey exterior with an expanse of glass-and-steel French doors that open onto garden courtyards and terraces marked by a progression of boxwood topiaries and pleached elm trees.\”

The theatrical experience continues at the top of a double floating staircase where visitors arrive at the rooftop restaurant in a skylight garden beneath a soaring atrium with retractable glass walls, sparkling crystal chandeliers and trellised London plane trees. The restaurant seamlessly opens onto a beautiful park, with, of course, select RH Outdoor collections.

The Gallery houses RH Modern, a curated and fully integrated assortment of modern furnishings, lighting, textiles and décor under one brand, plus the RH Interior Design Firm & Atelier. This interactive studio features private client presentation rooms with state-of-the-art technology, and an RH Rugs showroom presenting an exclusive collection distinguished by its artistry and materials.

Lots of drama here. A 25-foot threshold of glass and steel opens to the central hall with its 14-foot ceilings. Along the periphery, passageways lead to a room featuring RH Interiors collections from internationally renowned designers, as well as rare antiques and artifacts from Friedman\’s world travels. The tradtional approach? According to Friedman, \”Retail Malls are graveyards for short lived ideas.\”

Friedman\’s Lifestyle Vision

So, my next \”out of this world\” experience was stepping out of Friedman\’s Gallery and into his mind during our trip into New York.

Several years ago, I wrote that Ralph Lauren was arguably the first pioneer in creating a true and holistic lifestyle brand. Instead of creating a branded product or product category, he envisioned a branded style of life. My best description at the time was that he actually imagined a Gatsby world, portrayed through controlled imagery reflecting a world within which anything or any person (even himself), could be included, as long as they fit into his Gatsby-portrayed persona, from pants to paint and all kinds of other products.

Friedman is equally intent on creating and owning an RH world that is not defined by a single product or category. Rather, it can expand and include any product or service that fits and mirrors his opulent world view. In his words, \”We believe most retail stores are archaic windowless boxes that lack any sense of humanity. There\’s no fresh air or natural light, plants die in a department store and they\’re not optimal for humans either. That\’s why we don\’t build retail stores. We build inspiring spaces that are a reflection of human design, they are a study of balance, symmetry and perfect proportions. They blur the lines between residential and retail, indoors and outdoors, home and hospitality. They are filled with natural light and fresh air, with garden courtyards, and rooftop parks. Many have seamlessly integrated restaurants, wine vaults and barista bars.\”

So, how about \”guesthouses?\” In fact, he will be opening his first in Manhattan next year in proximity to the Gallery. Hey, how about apparel, housewares, beach and ski resorts? Given my long conversation with him aboard Ralph\’s former jet, I read between the lines that his long-term lifestyle vision was anything but speculative. As Friedman says, \”There are those with taste and no scale, and those with scale and no taste.\”

An Out-of-the-(Big)-Box Thought Process for Transformation

Friedman says there is a three-part thought process that most traditional old-world leaders go through:

  1. They consider the financial or business value.
  2. They frame and evaluate strategy and positioning.
  3. They think about and create the emotional value (the \”gut\” evaluation of emotionally connecting with the consumer).

Friedman says he flipped the process and starts with the emotionally connecting aesthetics the consumer will love and then strategy and the financials will fall into place. He explains, \”We rank every idea or strategy based on the Emotional, Strategic, and Financial value of the idea, in that order.\”

In terms of leadership, he affirms, \”We believe leaders have to be comfortable making others uncomfortable. We value team players, people who are more concerned with what\’s right, rather than who\’s right. None of us is smarter than all of us, and, we have to get all the brains in the game and the egos out of the room.\”

Friedman is unique and complex. He is surreal, a philosopher, an uber-character, an energizer bunny, a stream-of-conscious rambling brilliant visionary; a bit nutty, but, unstoppable until he hits a wall traveling at the speed of light – which is rarely.
He said, \”We believe in the rules of the jungle, where the big do not always eat the little, but the fast always eat the slow, and on Team RH, fast is as slow as we go.\” He was still talking to me after his entire team had deplaned — actually to my enjoyment.

RH was up and down like a roller coaster for over a decade. But CEO Gary Friedman stuck to his vision with a vengeance, even as it went through several life-threatening bleeding stages. And finally, he and his RH lifestyle brand are shaping a new world, in which many things and services can connect emotionally and prosper.

So, \”finally\” is incorrect. He\’s just beginning.

For more on Gary Friedman\’s worldview, check these out: The Death of Retail is Overrated;
Leaders Have to be Comfortable Making Others Uncomfortable



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