Restoration Hardwares supply-chain and technology infrastructure is a real fixer-upper opportunity.
“The problem with these guys is that they dont know how to make money,” says Russell Hoss, an analyst with Roth Capital Partners.
In January, Restoration reported that its same-store sales during the 2003 holiday season fell 3.5 percent over the year-ago period. The biggest problem? The company ran out of hot sellers early. Restoration Hardware, which makes its own furniture through a subsidiary, promises to deliver special-order couches and chairs with a selection of 50 fabrics to customers within eight to 10 weeks. But demand was greater than anticipated, delivery times were stretched out—and orders were canceled or pushed to the first quarter. The problems were magnified when the company had to discount its wares to compensate for out-of-stock items.
For instance, a red advent calendar cabinet—with 40 drawers counting the days leading up to Christmas—was out of stock by mid-December, says Ed Weller, an analyst at ThinkEquity Partners. Restoration had plenty of a white version of the cabinet, but the company had to discount to sell it.
“When you go to the stores, its clear that Restoration Hardware has something customers want,” says Weller. “Its challenge is the basic blocking and tackling of retailing.”
Similar inventory-management problems had occurred in the third quarter. In August, Restoration Hardware had rolled out an upholstered-furniture program to increase foot traffic in stores and boost sales. By the time its annual furniture sale rolled around—offering $200 to $250 discounts on selected furniture and bigger breaks on combination deals, like a couch and loveseat, the company couldnt meet demand.
Analysts say the repeated issues with fulfilling orders for custom-upholstered furniture prompted the December resignation of chief operating officer Tom Bazzone, who also oversaw the technology department.
The latest inventory miscues mean Restoration Hardware is likely to post a loss for 2003. It was expected to make a slight profit—which would have been the first time the company made money since the $4.9 million earned in 1998.
Technology could play a big part in a Restoration Hardware profit renaissance, but the company doesnt seem particularly interested. In its Manhattan store, two levels with hardwood floors highlight bed and bath goods and furniture for almost every room of the house. In between theres a quirky cast-iron dog—actually half of a dog—designed to look like hes stuck head-first in a hole in your garden.
But at checkout there are point-of-sale terminals dating back to 1995. The machines lack pads for entering personal-identification numbers, meaning the store can only process debit-card transactions with a signature. That doesnt eliminate all debit-card transactions, but limits a method of payment that accounts for 24 percent of all card transactions, according to Cardweb.com.
Next Page: Little automation and manual processes.
For special-order furniture, customers fill out a paper form that includes their fabric selection. Then a salesperson has to call Restoration Hardwares furniture-manufacturing unit, Michaels Furniture in Sacramento, Calif., to see whats in stock. Little if anything is automated, according to sales representatives at the Manhattan store.
Restoration Hardware and its technology suppliers declined to comment, but regulatory filings and industry executives familiar with the retailer paint the picture of a company that hasnt undertaken a significant technology project for about two years. Outdated systems cant predict demand well, these parties say, which became apparent during the holidays.
Since 1995, the company has primarily relied for its software and services on STS Systems, now a part of the United Kingdom-based NSB Group. NSB, which counts Nieman Marcus, Staples and Saks Fifth Avenue as customers, provides Restoration Hardware with systems for warehouse management, point-of-sale transactions and merchandise replenishment. Restoration Hardware also uses Lawson Software for its financial reporting and Hyperion for aggregating and analyzing sales data. Those implementations were finished in 1999 and 2000, respectively.
In its regulatory filings, Restoration Hardware last discussed its technology investments in its 1999 annual report, calling its systems an “important factor” in allowing it to grow and “maintain a competitive industry position.”
At the time, Restoration Hardware noted it polled its stores nightly to aggregate sales, inventory and pricing information, and that trend data was used to tweak merchandise assortment. It also touted a 1999 system, which ensured “smooth warehouse operations in a multi-warehouse environment.” Restoration Hardware operates three warehouses in California and one in Baltimore.
Restoration Hardware, however, doesnt employ common tools such as Internet-connected point-of-sales systems and demand forecasting.
Today, NSB is on release 4.0 of its warehouse-management system, which includes such capabilities as real-time task tracking and XML-enabled processing of advance shipping notices. According to sources close to the company, Restoration Hardware is still running version 2.0 of system—even though upgrades are included in the fees it pays annually to NSB. Restoration hasnt actually deployed any upgrades for its warehouse system since 1999.
Restoration Hardwares tools to replenish merchandise are also outdated systems bought from STS in the mid-1990s. These “green-screen” merchandising tools treat the acquisition of products, their distribution and allocation to a store and replenishment of the inventory as separate events in different systems. More-recent tools integrate those processes.
Next Page: Comparison to competition.
Restoration does plan to upgrade its point-of-sale system, according to W.R. Hambrecht analyst Kristine Koerber, but its unclear whether the system will be installed in 2004. The company has sent to suppliers a request for proposals.
A comparison between Restoration Hardware and peers such as Williams Sonoma and Pier 1 reveal the retailers inefficiencies. According to Raymond James Financial, a St. Petersburg, Fla.-based brokerage, Restoration Hardware brings up the rear in several key categories. Restoration only turned over inventory 1.9 times in the 12 months ending Nov. 1. Kitchen-goods retailer Williams Sonoma turned its inventory into sales 3.2 times. And Restorations gross profit margin checked in at 30 percent, tying it with the lowest of its peers. Those operating metrics come even as Restoration Hardwares same-store sales growth in each of the last four quarters averaged 7 percent over the previous years quarter.
Analysts say its unclear whether Restoration Hardwares current management can make the retailer more efficient. Most of the executives come from merchandising backgrounds and arent known for technology or supply-chain prowess. Gary Friedman, Restoration Hardwares chief executive officer, was a Williams Sonoma veteran who was brought in nearly three years ago as Restoration flirted with bankruptcy. Friedman has revamped the merchandise selection to boost sales, a process that has largely been successful. He also closed stores, remodeled existing ones and increased the number of goods imported directly.
Restoration Hardware executives havent been totally ignoring operational improvements. Catalog and Web sales were up 40 percent for the nine weeks ended Jan. 3, compared to the prior year. In 2002, the retailers Web site was put on Art Technology Groups electronic-commerce software, which increased the possible number of simultaneous customers to 12,000 from 150.
The retailer outsources call centers, customer-order management and fulfillment for its direct sales to NewRoads, a business-process-outsourcing company based in Alpharetta, GA.
Analysts say Restoration Hardwares decision to outsource its Web and catalog fulfillment hints that the company realizes its supply chain needs improvement. Michael Napolitana, an analyst at JMP Securities, wrote in a Jan. 9 report that the company needs to fix its infrastructure before it opens more doors.
“Restoration will need to address its legacy systems and supply chain processes before any new store growth is launched,” wrote Napolitana.