Restoration Hardware's Evolution Into Upscale Club Pays Off

(Bloomberg) -- RH shares climbed the most in four months after posting an upbeat forecast, a sign the retailer’s transformation into a membership club is paying off.

The upscale furniture chain, formerly known as Restoration Hardware, expects adjusted earnings of as much as $1.05 a share this quarter. Analysts had predicted 59 cents on average.

The results mark a dramatic comeback for a company that was battered by investors in 2015 and 2016 when its business hit the skids. As part of his turnaround plan, Chief Executive Officer Gary Friedman has embraced a membership model -- imagine a Costco of sorts for $5,000 sofas and $100 throw pillows. As part of the shift, RH is improving customer service while carrying less inventory and simplifying its logistics.

The company also has to rely less on promotions to get customers in the door, since it has more of a captive audience.

“With 95 percent of our core RH business driven by members, we can confidently declare our move from a promotional to membership model a success,” Friedman said in a letter published as part of its earnings report.

Investors have applauded the move. The shares gained as much as 26 percent to $94.80 on Wednesday, marking their biggest increase since November. Even before the rally, the stock had more than doubled in the past year.

The membership strategy was meant “to smooth out a chaotic business,” Friedman said on a conference call. “It’s done that.”

Restoration Hardware also is opening cafes, wine vaults and barista bars in its stores, aiming to lure customers who may then browse the furniture. Its latest test was a rooftop restaurant that opened last November at a shop in Florida. Friedman said it’s the company’s best-performing restaurant, on pace to rake in more than $7 million in its first year.

“Honestly, we were worried about it,” Friedman said. “We didn’t know if it would work or not.”

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