Sears Offer Throws Wrench into Restoration Hardware Deal
Restoration Hardware has a deal with Catterton Partners to take itself private. But that deal now appears as though it may be in jeopardy after Sears Holdings recently bought nearly 14 percent of Restoration Hardware’s stock while signaling it is considering making a bid for the entire company.
According to a 13D filing with the Securities and Exchange Commission (SEC), Sears Holdings’ chairman Edward Lampert and another member of the company’s board first contacted a non-management director at Restoration Hardware about a possible deal in June of this year.
In its filing, Sears Holdings said that it had made an offer of $4 a share for Restoration Hardware in October but the bid was rejected. On Nov. 8, Restoration Hardware announced its deal with Catterton Partners for $6.70 a share.
At the time the deal with Catterton Partners was signed, Gary
Friedman, chairman, president and chief executive officer at Restoration Hardware, said in a press release, “We are pleased to announce this transaction, which delivers significant value to our stockholders,” said Mr. Friedman. “In addition, we are excited about the opportunity to work with Catterton Partners, which has a successful track record and significant experience in the consumer and retail industries. We believe this partnership will provide us with important resources to execute our operating and growth strategies over the long-term.”
Discussion Questions: What do you make of Sears Holdings’ bid to acquire shares of and possibly a controlling interest in Restoration Hardware? What would Sears Holdings’ ownership mean for Restoration Hardware? What would Catterton Partners ownership mean for the company?
While all of the business entities involved in this movable deal are experienced chattel or chattel-holders, used to buying and getting bought, they could still miss out on the expected economies-of-scale and savings-through-synergies that are factored into the transaction(s) to make the numbers work. It happens all the time. A year or so into the deal a company spokesperson reveals that the projected savings from business integration have fallen short of expectations. This is a function of company culture. Companies that are constantly looking over the horizon, planning new stores and eyeballing future acquisitions, often fail to devote sufficient resources to taking care of today’s business. Thus, synergies are frequently lost.
Sears would offer a great boost to RH. They have a diverse mix and knowledge of all of the segments that RH retails towards, while at the same time, RH would give Sears more diversity by offering niche and high-end retailing. This would allow Sears to continue to diversify its’ retailing portfolio while increasing its stock appeal (that is really Ed Lampert’s true job). This is a better win than having RH purchased by the investment group and then being taken private. The requirements of public disclosure will continue to keep RH in front of a market that will value RH compared to its competitors. This is critical in determining RH’s value in the future vis-a-vis today’s investment. This would only be a great win for both sides from both a RH and Sears perspective. It is clearly better than any other alternatives.
I’m having trouble with it.
I think Restoration Hardware is too cool for Sears.
From a customer perspective, Restoration Hardware may help Sears, but the opposite isn’t true and I hope Sears wouldn’t monkey with RH’s merchandising.
The Kmart/Restoration Hardware/Sears associations don’t work for me.
I do not agree with other analysts who see brand and merchandising synergies in this potential acquisition. Restoration Hardware does not service the same customer group that either Sears Holding brand currently addresses, and the gap is very large. While there would be some benefit to bringing the Restoration Hardware brand into the Sears home environment, the impact on the Restoration retail brand would be severe. As an investment decision, with the value of the portfolio in view, jeopardizing the RH retail brand to provide “home store” legitimacy for Sears would not be an economically viable decision. The RH brand has some cachet, but for the most part doesn’t carry with it instant credibility to the extent that would significantly alter Sears home store market share.
However, it may very well be possible that the infrastructure and systems built at Sears Holdings are capable of handling another entity with little or no back office costs (other than post-merger trauma). ELS has been quite efficient at doing the due diligence to find retail operations with bloated cost basis below the GM line. Further, they’ve successfully identified operations where volume could be traded for elastic benefits on the GM line (improving GM% at a higher rate than the loss of volume). I don’t know if RH has this potential, although it does not appear to on the basis of the in-store and advertised sales and promotions.
Bottom line, I believe that the RH brand is available at a substantial discount to its peak, and that relatively speaking, the brand will be less sensitive to the subprime mortgage effect than others appealing to a more moderate or lower income consumer. Further, once the economy rebounds from the housing shocks, RH should be well positioned to grow. The niche in which RH competes is undergoing cyclical pruning, with Pier 1 on the way out and Bombay already gone.
If this acquisition moves forward, look for 12 – 24 month profit gains (after a short term shock) based on deep SG&A cuts associated with synergy, efficiency, and a focus on profit instead of comp store volume.
The comparison to Sears’ ownership of Lands’ End may be appropriate but not for positive reasons. Has Lands’ End become the umbrella for Sears’ effort to upgrade its apparel business or has Sears’ ownership tarnished the brand? You can make a theoretical case that Restoration Hardware is aligned with Sears’ strength in the home business…but will it receive the sort of specialized, upscale treatment inside a Sears store that sets apart its freestanding locations?
I am wondering if this the next phase of Lampert’s “Sears Turnaround” strategy.
The first phase was to acquire Kmart’s off-mall locations to convert into Sears stores. More Kmart stores are slowly being converted into Sears stores. Each new Sears store seems to be a bit different from the last. The chain seems to be constantly experimenting trying to find the right store layout and product mix before beginning a mass-renovation of all of the store locations.
The proposed acquisition of Restoration Hardware looks like an attempt to continue upgrading the brand name product offerings at Sears stores. I would guess that Sears stores will start selling the premium brands of Restoration Hardware in much the same way they currently sell Lands’ End products. After visiting the Restoration Hardware website, I must admit that their product lines would compliment Sears current products very well. Restoration Hardware’s multi-channel retail strategy also seems to be in-line with Sears current retail strategy. Sears seems to like catalogs again.
Sears buying Restoration Hardware is a good idea and a good brand match…too bad they didn’t do it 10 years ago, when it would’ve helped them both. Now, not so sure it’ll help either. But, if you think about it, there could be a lot of synergy there.
Sears may be the perfect entity to acquire this business. Sears obviously has expertise in the area as they have successfully lived in the hardware space for many years. Having interest in Restoration Hardware seems natural and a great way to reach additional consumers. The addition of this new business gains a different consumer than the typical Sears shopper. Given that, one could conclude that many economies of scale could be employed if the acquisition takes place.
Restoration Hardware outlets would also present several opportunities for cross merchandising and cross branding. All in all, given the available information, this feels like a smart move on Sears part as they continue to fight for their share of the consumers dollar.
ESL (Ed Lampert),although most famous for controlling Sears Holdings, also invested in AutoZone, Sears Canada, and AutoNation. More recently, he invested in Home Depot. Chatterton owns Outback Steakhouse and used to own Build-A-Bear Workshop and P.F. Chang restaurants. Both ESL and Chatterton are known for buying retailers and making them more valuable. Restoration Hardware has been trying to improve its results for a long time. Both Chatterton and ESL bring capital and expertise to help that happen.
Restoration Hardware, though it has legitimate cachet in the marketplace, has always struggled to make money; it will now have no chance to make money. Sears/Kmart will destroy the brand. As they fade from everyone’s radar screen and become less relevant every season, these weak attempts to cash in on purchased retail brand equity have less value and effectiveness.
As an investment, Restoration Hardware has a great deal of upside potential. But–if Mr. Lampert and Sears Holdings become the owners of the company, it is likely this innovative retailer will continue to struggle and quite likely disappear from the retail marketplace.
At Sears, Mr. Lampert has slashed operating costs to the point the company can be profitable on far lower sales volume. That same strategy will not work with a specialty retailer whose customers expect a great deal more in the way of merchandise and service.
The question of whether or not this is a good idea depends on who you are. For Restoration Hardware, it may be a chance to get expansion capital and join up for buying power. As for merchandising and marketing assistance neither Sears nor Kmart has any. They are both out of touch with the consumer as evidence by the double digit declining comp store sales. I question the comment that ESL has retail experience. There is a big difference in owning stock in a company and another to actually run the company. At this time there is no turnaround at either Sears or Kmart, only Real Estate sales.
I agree with the other comments that this doesn’t seem a likely fit as the customer segments are far apart. The deal may upgrade Sears and add to their differentiation, but their lack of customer service and knowledgeable sales staff may take some of those benefits away.