Reforming Restoration

The Dow is now at 11,000, after leaping another 225 points today on continued strength in those boring old cylical stocks. But I don’t have anything interesting to say about this milestone. The only thing worth remembering about it is that the higher the Dow gets, the smaller–in percentage terms–each thousand-point increment becomes. When we get to Jim Glassman’s Dow 36,000 utopia, each 1,000-point rise will be equivalent to just 2.8 percent. Whoopee!

In any case, rather than pontificate about the Dow, I’d like to pontificate about Restoration Hardware, the wonderful home-decorating store for people with a faint idea that many of the best things about America could be found in 1950s hardware stores that still carried lots of stuff from the 1930s. Restoration has been a retail phenomenon, and in a sense created a market that no one really knew existed. (See Tim Noah’s piece on the appeal of Restoration Hardware.) Unfortunately, it’s not clear that that market is one that can drive Restoration’s business where its management apparently wants to go.

Friday, Restoration’s stock fell 40 percent after analysts downgraded it because of expected losses in the next two quarters. Shelly Hale, an analyst at Nationsbanc, pointed to Restoration’s huge mission-style and leather furniture sale in the first quarter, and said that its success was going to punish the company’s bottom line. Restoration offered its furniture at 25 percent off, and apparently customers opened their wallets.

Now, the whole point of a sale is to move merchandise. The problem is that Restoration doesn’t make much profit on its furniture to begin with–in business jargon, this means furniture has poor “gross margins”–and it makes even less profit after marking prices down 25 percent. As a result, in its latest quarter, furniture sales are going to make up a higher percentage of Restoration’s business than normal, and that is going to drive the company’s profit margins down.

It’s possible that this is simply a momentary blip, and that Restoration will in fact become the Gap of home decoration. But it’s more likely that these recent problems point up a basic difficulty in Restoration’s entire business model, which is that the best stuff it sells is little stuff: the gadgets and home-cleaning supplies and polishes and ice cream scoops. I went into Restoration about a week ago and came out with a bag full of this stuff. But Restoration’s furniture, which is nice but not especially distinguished, doesn’t have that same faux-unique flavor that all the little stuff does. I’ll buy leather conditioner from Restoration because it says that it’s the kind that equestrians use on their saddles (such is my patheticness as a consumer). But Mission-style furniture or club chairs I can get elsewhere. I don’t need the Gap for that.

Now, maybe this isn’t a problem, assuming I’m right. After all, if margins are much better–and they are–on the little stuff, then selling more of it would be good. Unfortunately, Restoration sees itself as a home-furnishing store, as much as a hardware store (that means it’s competing with Pottery Barn, etc.). And it’s expanding and investing with that thought in mind. In other words, Restoration’s ambitions appear to be such that it can’t simply remain a high-margin, lower-sales chain. It wants to be bigger, even at the cost of lower profitability.

Is there a more common problem in corporate America than this kind of overreaching? A couple of days ago, I wrote here about the inability of some retailers to see what their competitors were doing well and then emulate it. For Restoration, the task is even simpler. It just needs to see what it is doing well and restrict itself to that. I’ll be surprised if it does, but I hope it succeeds. I mean, where else will I be able to find “the best dust pan ever made” if Restoration disappear?