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Restoration Hardware's New CEO Says He'll Retool Home Store Chain


Quirky home store chain Restoration Hardware, which during the last two years has gone from market darling to Wall Street dud, is looking to remodel its business by putting former Williams-Sonoma Inc. President Gary Friedman in the top job.

The question Thursday was whether Friedman, long known as the brilliant merchandiser behind Williams-Sonoma and Pottery Barn stores, is the best choice to lead a company that many say has great products but a disappointing financial performance.

"I don't think there's any question that his talent lay in merchandising, he was a visionary," said Shelly Hale, an analyst with Banc of America Securities in San Francisco. "But at Williams-Sonoma, some didn't think he demonstrated the ability to take the company to the next level, financially and operationally."

At the same time the company announced Friedman's role, Restoration reported better-than-expected earnings for its fourth quarter and a $15-million cash infusion from private investors--particularly positive news for a chain that has had numerous operational and sales difficulties over the last two years.

On a conference call with analysts Thursday, Friedman talked about paring down the mix of goods at Restoration--eliminating some of founder Stephen Gordon's sentimental items that many think give the store its charm.

In their place, Friedman said, belong higher-margin "lifestyle" products that the upscale Restoration customer wants, such as window treatments, linens and floor coverings. But Friedman is careful to say that he will not be building a new Pottery Barn.

"From a quality perspective, Restoration has always been above Pottery Barn," Friedman said. "I think there's a void in the marketplace between Pottery Barn and the interior designers of the world."

Friedman succeeds Restoration Hardware founder Gordon, who opened his first store in Eureka in 1980. He will remain chairman.

Known for its re-creations of classic American goods--an offbeat mix of high-priced fixtures, lux leather and wood furniture and updated 1950s toys--Restoration already had earned the adoration of consumers and strong valuation from investors when it went public in 1998.

Eager to increase its success, the company expanded quickly and ran up against the classic problems of fast growth: distribution snafus, merchandise misses and under-performing stores.

After an initial public offering of $25 a share in the summer of 1998, Restoration watched its stock climb in a month to almost $37.75.

On Thursday, however, with a far smaller increase, Wall Street indicated approval of Friedman's appointment. Restoration's stock closed at $4, up $1.81--a gain of 84% from the previous day's close.

"Gary knows how to do this and has the wind at his back, since home furniture is one of the fastest-growing segments in the retail industry," said Kevin Silverman, an analyst with Madison Partners in Chicago. "The valuation is so cheap that if you take away a big risk of failure, which I think Gary does, the chances of success are good."

But Restoration executives also said the slowing economy would take its toll in the current quarter; February and March sales probably will be down 15% to 18%.

The uneven report led some on Wall Street to suggest that a fragile company that has had operational problems might be better run by someone with a stronger record of retail turnarounds.

Friedman left the company he helped build just last week, after the chief executive at Venator Group Inc., Dale Hilpert, was appointed to lead Williams-Sonoma. Shares of Williams-Sonoma fell as much as 12% on the news of Friedman's departure, a nod to his significant role in dramatically expanding the company's namesake stores and building Pottery Barn.

Gordon, the mastermind of the 107-store, Corte Madera, Calif.-based Restoration chain, said Thursday that Friedman is the perfect man for the job.

"To turn a business that customers love to one that the investors love is getting better revenue out of the stores and better margins out of the stores," Gordon said. "And that isn't really done by an operator, it's done by a merchant."

Friedman also is betting on himself. A combination of investments in the company and stock options will give him a 10% stake in Restoration Hardware.

"Everybody has painted me in this one corner," Friedman said, noting that he came to Williams-Sonoma to work in retail operations. "I may not be the world's greatest operator, but I'm pretty well rounded because I've been on both sides of the company."


Slight Boost

Restoration Hardware's stock got a lift Thursday when the company hired former Williams-Sonoma President Gary Friedman as chief executive, but it's still way off its peak of $37.75 in July 1998.


Restoration Hardware, monthly closes and latest on Nasdaq

Thursday: $4.00, up $1.81

Source: Bloomberg News

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