RH doubles down on experiential brick-and-mortar retail—and hospitality

Not every retailer includes a quote from a Robert Frost poem in its quarterly financials. But RH (formerly Restoration Hardware) is not your average retailer.

The upscale home furnishings company reiterated its commitment to — and belief in — physical retail in its second-quarter earnings statement. RH reported mixed results, with sales that missed expectations but profit that topped forecasts. It also spent a good amount of time detailing its ambitious brick-and-mortar strategy.

“While most in our industry are closing or downsizing stores, we remain committed to our quest of revolutionizing physical retailing,” Gary Friedman, CEO, RH, wrote in a letter to shareholders that accompanied the earnings statement. “The road of endless promotions, free shipping, and a shrinking store base is resulting in broken and unsustainable retail models. We prefer the road less traveled by, and like Robert Frost, believe it will make all the difference.”

For RH, the “road less travelled” includes sparing no expense to build stunning stores (or “galleries” in RH speak) that, increasingly, include varied food and beverage elements ranging from a coffee bar to a sophisticated restaurant. Its new store in Nashville is the fourth RH location to feature the company’s “integrated hospitality experience.” The company is encouraged by hospitality results and plan to add more in the future.

“With three of our four restaurants trending to generate $5 million to $6 million annually, and our fourth at approximately $4 million, we believe RH Hospitality is now a proven scalable business, and we plan to increase the number of new Galleries with integrated restaurants, wine vaults, and barista bars going forward,” Friedman stated.

RH will go full circle with hospitality next summer, with the opening of its first boutique hotel, RH Guesthouse. It will be located in Manhattan’s Meatpacking District, steps away from its new store. Another hotel is planned for Aspen, Colorado.

In other new store openings, the company will open a location in the Napa Valley, in Yountville, California, on Sept. 23. Befitting the location, the site will include a two-story stone wine vault with outdoor trellis-covered living rooms that can be reserved for wine tastings, an indoor — outdoor restaurant with a glass roof and retractable steel and glass doors, and garden courtyards with outdoor fireplaces.

RH has several new brand extension plans in its development pipeline, including RH Beach House, and RH Color, which it will launch in 2019. The retailer also has developed a new, “multi-tier” market approach that includes a new, smaller RH gallery prototype that will enable it to more quickly move into a market. It will range in size from 33,000 sq. ft. (inclusive of its hospitality experience) to 29,000 sq. ft. without it.

“Due to the reduced square footage and efficient design, these new prototypes will be more capital efficient with less time and cost risk, but yield similar productivity,” Friedman said. “We anticipate these new Galleries will represent approximately two thirds of our target markets and enable us to ramp our opening cadence from three to five new Galleries per year, to a pace of five to seven new Galleries per year.”

In addition, RH is developing an even-smaller gallery format tailored to secondary markets that will range in size from 10,000 sq. ft. to 18,000 sq. ft.

“We believe these smaller expressions of our brand will enable us to gain share in markets currently only served by smaller competitors,” Friedman said. “We expect these Galleries to drive $10 to $15 million of revenues at a net investment of $0 to $5 million, with a payback on our invested capital of 0 to 2 years.”

But the company is not eliminating its pricey “bespoke’ galleries format which targets top metropolitan markets and top second-home markets. In addition to the upcoming Manhattan and Napa Valley locations, one is planned for San Francisco in 2019.

“These iconic locations are highly profitable statements for our brand, and we believe create a long-term competitive advantage that will be difficult to duplicate,” Friedman said.

For Friedman, nothing online can duplicate the RH brick-and-mortar experience.

“We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape, and we would argue, will also prove to be equally valuable,” he stated.

RH is confident about its long-term outlook. It said it sees "a clear path to $4 to $5 billion in North American revenues, as well as a significant international opportunity that could lead to RH becoming a $7 to $10 billion dollar global brand."

RH earned $64 million, or $2.33 a share, in the second quarter ended Aug.4, versus a loss of $8 million, or 28 cents a share, in the year-ago period. Adjusted for one-time items, RH earned $2.49 a share. Analysts had expected adjusted earnings of $1.75 a share.

Revenue rose to $641 million from $615 million, less than analysts expected.