Restoration ProjectBy Larry Dignan | Posted 2004-02-09 Print
One specialty retailer spent two years revamping its merchandising strategy. Now it has to figure out how to deliver the goods it wants to sell.Restoration Hardware's supply-chain and technology infrastructure is a real fixer-upper opportunity.
"The problem with these guys is that they don't 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% 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 outand 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 cabinetwith 40 drawers counting the days leading up to Christmaswas 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, it's 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 aroundoffering $200 to $250 discounts on selected furniture and bigger breaks on combination deals, like a couch and loveseat, the company couldn't 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 profitwhich 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 doesn't 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 there's a quirky cast-iron dogactually half of a dogdesigned to look like he's 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 doesn't eliminate all debit-card transactions, but limits a method of payment that accounts for 24% of all card transactions, according to Cardweb.com.
For special-order furniture, customers fill out a paper form that includes their fabric selection. Then a salesperson has to call Restoration Hardware's furniture-manufacturing unit, Michael's Furniture in Sacramento, Calif., to see what's 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 hasn't undertaken a significant technology project for about two years. Outdated systems can't 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, doesn't 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 systemeven though upgrades are included in the fees it pays annually to NSB. Restoration hasn't actually deployed any upgrades for its warehouse system since 1999.
Restoration Hardware's 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.
Restoration does plan to upgrade its point-of-sale system, according to W.R. Hambrecht analyst Kristine Koerber, but it's 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 retailer's 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 Restoration's gross profit margin checked in at 30%, tying it with the lowest of its peers. Those operating metrics come even as Restoration Hardware's same-store sales growth in each of the last four quarters averaged 7% over the previous year's quarter.
Analysts say it's unclear whether Restoration Hardware's current management can make the retailer more efficient. Most of the executives come from merchandising backgrounds and aren't known for technology or supply-chain prowess. Gary Friedman, Restoration Hardware's 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 haven't been totally ignoring operational improvements. Catalog and Web sales were up 40% for the nine weeks ended Jan. 3, compared to the prior year. In 2002, the retailer's Web site was put on Art Technology Group's 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 Hardware's 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.
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