Restoration Hardware CEO, Now A Billionaire, Aims To Make His Company A Luxury Giant

As coronavirus began to sweep across America, putting much of the country in shutdown, luxury furniture retailer RH — formerly known as Restoration Hardware — executed a slew of cost cutting measures. On April 6, CEO Gary Friedman announced that the firm was laying off 440 employees, temporarily furloughing 2,300 workers, and instituting pay cuts for all leadership positions. Its stock, which had traded at more than $250 per share in mid February, plunged to $80.43 on March 23. 

Since then, RH’s shares have tripled in value, as the firm announced increasingly ambitious goals while weathering the pandemic. Friedman, who joined the $2.6 billion (2019 sales) company in 2001, is now a billionaire worth an estimated $1.5 billion. As RH’s largest individual shareholder, Friedman owns 10% of the company, with options that could lift his stake to 28%. 

RH’s first quarter which ended on May 2, showed the impact of the pandemic, as its signature “gallery” stores — opulent showrooms that often span tens of thousands of square feet and feature amenities like rooftop restaurants and wine bars — shuttered. Its revenue dropped to $483 million from nearly $600 million in the same quarter a year ago, while operating margins fell to 7.3% from 11.5% a year ago. But its earnings per share of $1.27 beat Zacks’ consensus estimate of $0.80 per share.

Things may be on the upswing for its second quarter, as orders placed for its home furnishings were up 11% year-over-year in the first week of June. In a June 3 letter to shareholders, Friedman laid out a grand vision for how he plans to turn RH into a global luxury powerhouse by entering new businesses, including hospitality, residential housing and more.

“Our strategy to open new design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America, with the long term potential to become a $20 billion dollar global brand,” Friedman wrote, adding that he also aims to boost RH’s operating margin to 20% in the next few years. He showed off additional lines of potential revenue, such as RH3, a luxury yacht available for charter in the Caribbean or Mediterranean seas, and RH Guesthouses, the furniture firm’s own branded hotels.

To top it off, RH will build an interior design, architecture, and landscape architecture services platform inside its galleries, remake its website, and take a stab at high-end housing. “Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences,” Friedman wrote. “We believe the ecosystem can be expanded globally, multiplying the market opportunity to approximately $7 to $10 trillion, quite possibly one of the largest and most lucrative addressed by any brand in the world today. A one percent share of the global market represents a $70 to $100 billion opportunity.”

Investors seem to share Friedman’s optimism; RH’s stock price closed at a record high of $255.26 on June 3.  By mid June, 66 of its 68 stores and 37 of its 38 outlets reopened, and more than 90% of the furloughed employees returned to work, according to the firm. RH opened its first new “gallery” store this year in Charlotte, North Carolina on June 12, and is opening another in Corte Madera, California — just north of San Francisco — later this summer. It plans to debut RH England, its first showroom in Europe, in 2021, though the company has not shared details on the specific location. Friedman declined an interview request from Forbes. 

 The combination of sheltering in place (possibly leading to people spending more on their homes), a better than expected first quarter, a strong start to the second quarter, and RH’s high aspirations led to the firm’s sweltering valuation, says Anthony Chukumba, managing director at investment bank and brokerage Loop Capital Markets. “Investors are starting to realize, maybe we shouldn’t be valuing RH as a furniture retailer, maybe the right comparable companies are not Williams-Sonoma and Ethan Allen… Maybe we really need to start looking at this company more like a luxury retailer, more like a Tiffany, more like a LVMH,” he says.

But Friedman’s plan to leap from furniture retailer to global luxury brand has attracted its share of skepticism. Details on RH Guesthouses and RH Residences are scarce. The first guesthouse, located in Manhattan’s Meatpacking District, has had its opening date pushed back several times; it’s now projected to open in the spring or summer of 2021. A second guesthouse is under construction in Aspen, Colorado, where the company plans to build an “ecosystem” consisting of a gallery, a guesthouse, a spa, two restaurants, and an unspecified number of residences.

The firm would not comment on the timeline of the project, but confirmed that RH plans to build and operate its own hotels and residences, instead of licensing out its name. Furthermore, its hotels will not use or display RH furniture; instead, they are designed to provide a luxury experience that elevates the overall RH brand. 

“The business appears to be pivoting into providing services rather than selling goods. It’s a sea change in strategy. It’s reasonable to question the execution, but the more simple question would be: Why not execute to the existing opportunity, which they have yet to do? Why pivot?” asks Todd Fernandez, a principal at Forensic Research Group. In 2014, Friedman announced that RH’s development of new galleries would be key to boosting the company’s revenue to $4 to $5 billion — a figure that RH has yet to achieve. 

Although even naysayers marvel at RH’s ultra-luxe gallery stores, its ability to scale to the magnitude of LVMH has been questioned, considering wealthy shoppers change their purses far more frequently than their living room sets. “It’s very difficult to scale these one-off builds,” Fernandez says of RH’s galleries. “Just because you spent $150 million on a fancy store in New York doesn’t mean you sell more furniture in Wichita, Kansas.” 

RH trades at 34 times its trailing earnings as of June 23; its closest comparable, Williams-Sonoma, trades at 20 times earnings. Even luxury titan Bernard Arnault’s LVMH, which owns brands like Louis Vutton and Christian Dior and boasts an operating margin of 21.4%, has a price-to-earnings ratio of 28 times. “It’s just the natural evolution of if your story runs out, create a new story, and get investors excited,” Fernandez says of Friedman’s ambitions.

Friedman, 62, is no stranger to criticism. Born to a mother who had schizophrenia and bipolar disorder, he lost his father at age 5 and spent much of his childhood moving from apartment to apartment. He gained his foothold in retail as a stock boy at a Gap store. After he got a D average in his first year at Santa Rosa Junior College, a college counselor told him he was wasting taxpayers’ money — so he dropped out and focused on his work at Gap.

The move paid off; Friedman rose to oversee 63 Gap stores in southern California as a regional manager, before jumping ship to Williams-Sonoma, where he became the president of the Williams-Sonoma and Pottery Barn brands. From 1988 to 2001, Friedman transformed Pottery Barn from a $50 million (sales) business — mostly dealing in tableware — to a $1 billion plus (sales) furniture retailer. He came up with the Williams-Sonoma Grande Cuisine Store concept — the brand’s spacious shops with kitchens and tasting bars in the middle — and spent three years developing the West Elm brand, which launched a year after he left. 

When he landed at RH in 2001, the company was on the brink of bankruptcy, and made its money selling kitschy, nostalgic items like a garden gnome named “Aqua-Troll” that sprinkled water when connected to a hose. Friedman engineered its transformation into a luxury furniture brand, raising eyebrows with moves like increasing prices during the 2008 recession. When the firm went public on the New York Stock Exchange in 2012, it had an annual revenue of $958 million and a net income of $21 million; in 2019, the firm reported $2.6 billion in revenue and $220 million in net income. 

“There’s been a lot of people that have doubted him, and a lot of people that have been proven wrong. If it’s good enough for Warren Buffett, it should be good enough for most people,” comments Chukumba (Buffett’s Berkshire Hathaway owns a 9% stake in RH). “You don’t have to assume everything is going to go right for them. Let’s just take a lot of that other stuff like RH houses off the table. If they can successfully open those international stores, so RH England, RH London and RH Paris, and they do the type of volume that I think they can do, and continue to open these full design galleries domestically, you can make the argument that the stock is significantly undervalued.”