It’s the kind of tale that corporate flacks ache for, a company story so sweet you have to see the dentist after telling it. Way back in 1979—before the San Francisco 49ers had won a single Super Bowl and years before George W. Bush could find Iraq on a globe—Stephen Gordon was hard at work in Eureka, California, restoring a Queen Anne home to open as a bed and breakfast. Gordon was a stickler for detail, and he was disappointed as he tried to replace doorknobs and drawer pulls. None of the hardware to be had in his town looked old fashioned or had the right style. He was also obsessed enough to believe he wasn’t alone in his pursuit of such things.
Gordon finished restoring the house and, a year later, turned it into a store that offered period goods. But the shop, which he called Restoration Hardware, was much more than a place to score a genuine reproduction of a Victorian floor register at a hefty markup. It was a big fat slice of yesteryear served with a dollop of nostalgia and a soupçon of humor. Gordon wrote the copy for the point of sale signs in the store and stocked reproductions of old toys and amusements, calling on his childhood for inspiration. By 1998, he sat atop a retail chain boasting 47 stores, and the company went public as yuppies harkening back to the good old days bought moon pies and teak steamer lounge chairs.
It was Warren Buffet of Berkshire Hathaway fame who said companies behave differently once they go public. Or maybe it was Jimmy Buffet. At any rate, by 2000, the company was on its way to doubling in size and struggling with a combination of growing pains and inventory woes so severe Chapter 11 bankruptcy protection was being quietly contemplated. The company recapitalized with a preferred stock offer, and Gary Friedman was hired away from rival Pottery Barn in an effort to right the boat. Gordon cut his ties with the Good Ship Restoration in 2005.
As for Restoration’s stock, to say it’s been volatile is to say a pig is just hungry. The stock has been as high as $36 a share and as low as less than $1. In 2002, the company announced it needed to restate earnings for 2000 and 2001 because of accounting issues—not the kind of thing to inspire investors or, for that matter, Wall Street analysts.
Which makes the buyout by Connecticut equity player Catterton Partners and Restoration CEO Friedman kind of interesting. It will be even more interesting if it happens. Catterton originally offered $6.70 per share to buyout the company. But Sears stepped up and rained on that parade a little, besting Catterton and company’s offer by a whole nickel.
That’s right, Sears, “Where America shops,” made a preliminary offer of $6.75 per share to buyout Restoration lock, stock and leather furniture collections. The Hoffman Estates, Ill., company already owns 13.7 percent of the now Corte Madera-headquartered retailer and has been nosing around since November. Sears Holdings, led by billionaire hedge fund ace Edward Lambert, signed a confidentiality agreement with Restoration after Lambert began to make noise that Sears wasn’t being given the same chance to pursue Restoration as Catterton, and that maybe Restoration favored that bid because Friedman was part of the buyout team.
Restoration then offered to open its books for Sears so long as Lambert and company agreed to freeze attempts to buy more stock before the sale, a strategy meant to hold Sears off a hostile takeover.
Sears had a brutal third quarter in 2007, posting net income of just $2 million. Compare that to its 2006 third quarter income of $196 million, and you have to wonder about Sears adding more retail to its plate.
In 2002, Sears bought out Land’s End, a retailer with a substantial direct-to-consumer hook, and successfully incorporated the catalog merchandise into its stores. Retail analysts are saying Lambert is hoping to bring Restoration Hardware, an upscale brand, into the Sears stores for the fairly cheap price of $267 million. It remains to be seen how Lambert will blend Kenmore washers and Craftsmen tools with $2,500 canopy beds.
Sears may want to spend some time with the books. While Restoration made a show in late 2007 of pink slipping more than 100 employees out of its Corte Madera corporate offices, company insiders report the move was short-lived. While nobody wants to talk on the record as far as payroll numbers, one executive commented that the halls were once again crowded—though some of those wearing name tags are now temps.
Sears hasn’t talked about what would happen to the Corte Madera headquarters or the 3,700 employees Restoration has in its 110 stores and outlets.
It’s ironic that, just as Restoration is hitting a stride with online sales (2006 sales were $122 million, in 2005 just $76 million), Sears steps in.
Though Restoration management has been quiet while being courted by both Catterton and Sears, insiders at the company originally thought the Catterton buyout made sense and felt there was a certain level of comfort there. That was reaffirmed as January drew to a close and Catterton made a different offer, dropping its buyout to $179 million, or $4.50 per share. The lower price reflects a poor showing by Restoration at Christmas. Catterton sweetened the deal, however, with a $25 million loan that Restoration can use right about now. Restoration and Catterton expect to close the deal February 28, though Sears (or anybody else who wants to take a swing) can certainly make an offer.
At the same time Catterton changed its bid and made the loan, Sears dumped its CEO, Aylwin Lewis, as Lampert tried to convince Sears stockholders and Wall Street that he’s serious about bringing the aging retailer back. Will Restoration Hardware be a part of that comeback? Stay tuned.
