Restoration Hardware plunges on loyalty program woes, catalog delay

Dive Brief:

Shares of Restoration Hardware plunged some 20% in late Thursday trading after the upscale furniture retailer lowered its guidance for the fourth quarter, blaming muted holiday sales, loyalty program struggles and delays to its massive print catalog.
Restoration Hardware's Q3 net revenues increased 3% to $549.3 million, compared to a 10% increase and $532.4 million last year, while same-store sales fell 6%, compared to a 7% rise in the same period last year, beating the 12.8% decline expected by FactSet analysts cited by MarketWatch.
Overall store revenues increased 9% to $306.8 million in the third quarter, compared to a Q3 2015 increase of 16%. Direct-to-consumer revenues decreased 3% to $242.5 million and represented 44% of total net revenues, Restoration Hardware said. Thomson Reuters analysts had estimated $637.6 million in revenue and $1.08 per share in earnings for the quarter.

Dive Insight:

In recent years, Restoration Hardware has been something of a comeback story, despite ignoring much of the conventional wisdom of today’s retail world. After struggling, going private to regroup and then going public again, the home furnishings retailer has dedicated its efforts to expanding its brick-and-mortar strategy and its huge paper catalog, leaving its social media strategy to customers and fans.

But Restoration Hardware has slipped of late, and responded by revamping its business strategy to include a pay-to-play model for its RH Grey Card loyalty program in lieu of offering sale prices. For a $100 a year, customers enjoy 25% off in all departments, 10% off clearance items, complimentary interior design services, early access to clearance events and lower interest rates on the RH credit card. Perks don’t include free shipping, however. Moreover, the membership model is a proven but likely oversaturated one, Profitero VP of strategy and insights Keith Anderson has told Retail Dive.

While Restoration Hardware Chairman and CEO Gary Friedman said in a statement Thursday that third quarter results exceeded expectations, the company admitted that sales have stalled since the premium membership model rolled out, and warned that the timing of recognizing revenues related to the RH Grey Card transition — as well as expenses related to the launch of its RH Modern lines, investments in stores and the decision to push its catalog mailing from the spring to the fall — will temper results in the short term.

“[O]ur business in November was below our expectations, which we largely attribute to consumer softness related to the U.S. election and our Fall 2016 Source Books getting in homes later than planned,” Friedman said. “While our Fall 2016 Source Books began mailing in mid-September, the vast majority of the circulation is just getting in homes over the last few weeks, versus our original expectations for the books to be building earlier in the mailing cycle. This is resulting in a shift of sales that would have been booked in the fourth quarter into the first quarter of next year. In addition, sales of our holiday collection are trending lower than our expectations.”

Restoration Hardware says it now expects Q4 net revenues in the range of $562 million to $592 million and adjusted net income in the range of $24.5 million to $28.5 million, or between 60 cents and 70 cents per share. For fiscal year 2016, the company now says that net revenues will fall in the range of $2.11 billion to $2.14 billion, representing flat-to-1% growth from the prior year, and that adjusted diluted earnings will be in the range of $1.19 to $1.29 per share.

While Restoration Hardware has logged some disappointing results in recent quarters, its struggles may be fleeting, according to Håkon Helgesen, retail analyst at research agency and consulting firm Conlumino.

“With such a set of numbers it is easy to paint a picture of a company in trouble. However, the reality is a bit more complicated than this, and it is not quite as negative as might be imagined,” Helgesen said in a note emailed to Retail Dive. “It is certainly true that there are some issues which have impacted RH over this period, including a softening of consumer interest over the election period and the company’s late delivery of its 2016 Source Books to consumers, however these are largely transitory and will dissipate as the company moves into its next fiscal year.”

A series of major investments in its supply chain and its store fleet are sapping Restoration Hardware's revenues, but its innovative approach could yet pan out, Helgesen said. But he questioned the new membership approach, saying that it's an admission that Restoration Hardware's prices are too high and calling it an “over-complicated way to solve a simple problem.” In fact, the move away from promotions could end up costing Restoration Hardware sales, Helgesen warned.

All in all, only time will tell whether Restoration Hardware's approach bears fruit. “The extent of this issue, and the returns on investment, will become more evident in the new fiscal year as RH begins its recovery,” Helgesen said.

The company also announced Thursday that, effective Jan. 1, it will change its corporate name from Restoration Hardware Holdings, Inc. to “RH” and that its stock ticker symbol “RH” will remain the same.