market watch | Oct 16, 2018 |
Does Gary Friedman want to take RH private?

This week marks the three-year anniversary of the launch of RH Modern, a milestone no one at RH, the company formerly known as Restoration Hardware, is likely eager to commemorate. Described in a press release at the time of its launch as an entirely new business and a first-of-its-kind retail concept, RH Modern was lauded by Gary Friedman, RH’s chairman and CEO, as “our finest work to date.”

RH
RH's new location in the Meatpacking neighborhood of New YorkCourtesy of RH

Instead, what followed was the most disastrous new product introduction in the company’s history, one that would lead to a series of shareholder lawsuits and bring RH to the edge of financial ruin.

As we’ve previously reported, RH’s board of directors responded to the dramatic drop in the company’s shares by authorizing a $1 billion share repurchase program beginning in early 2017. In less than 5 months, the company bought back 50 percent of its outstanding shares, significantly leveraging its balance sheet in the process.

Today, the company is still feeling the effects of the RH Modern rollout. Facing accusations that Friedman and others on his team concealed information about low inventory levels and production issues, the company learned recently that the Honorable Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of California has granted the plaintiffs' motion to certify a class of investors who acquired RH stock between March 2015 and June 2016. The judge rejected RH's arguments that the allegations were too complex to qualify for class treatment and noted that "the amount of information that was allegedly hidden from the class was significant."

Does Gary Friedman want to take RH private?Assuming Friedman holds on to all the shares he owns currently, he will soon control more than one-third of the company, leading me to wonder if the next step might be to take the company private altogether.


In addition to the company’s legal woes, RH’s board has recently been beset by a share price in freefall. By Wednesday of last week, shares of RH had lost one third of their value since Labor Day. Unable to stop the decline, it seems the company has reached for the only sure way it knew to turn its shares around in a hurry: Buy back so many shares all at once, that it forces the price to move higher.

On Thursday, the company announced that it would launch yet another massive share repurchase program. Friedman has spent much of this year stressing that 2018 would be dedicated to rebuilding the company’s balance sheet and replenishing its cash position, so it was all the more surprising that with just $22 million in cash and cash equivalents on hand—and the dust barely settled from last year’s heavily leveraged transaction—that the company would announce its intention to repurchase another $700 million worth of its shares.

“We continue to believe our shares are undervalued and this new repurchase program reflects our confidence in the outlook for our business and continued improvements in our operating model,” said Friedman, who personally purchased $1 million of RH stock just last month. “We believe that this capital allocation strategy represents an opportunity to create value for our long-term shareholders.”

RH shares jumped 18 percent over the next two days, in the face of a very challenging week for the stock market as a whole. A $700 million share repurchase, if executed as quickly and efficiently as the previous one, would represent 25 percent of the outstanding shares.

Does Gary Friedman want to take RH private?RH is currently the ninth-most-shorted stock (short sellers are betting that the price of shares will fall; they borrow shares, sell them, and then hope the price drops so they can buy them back at a lower price and pocket the difference) on the New Stock Exchange...


Assuming Friedman holds on to all the shares he owns currently, he will soon control more than one-third of the company, leading me to wonder if the next step might be to take the company private altogether. RH is currently the ninth-most-shorted stock (short sellers are betting that the price of shares will fall; they borrow shares, sell them, and then hope the price drops so they can buy them back at a lower price and pocket the difference) on the New Stock Exchange, and Friedman is no doubt growing weary of going to battle with the forces on Wall Street who continue to bet against him.

According to recent filings with Securities and Exchange Commission, RH has access to a lot more cash. (The company has an untapped revolving credit line of up to $600 million, which includes a $200 million accordion feature that would allow for the credit line to be expanded up to $800 million, assuming certain terms and conditions are met.) RH’s next earnings report should shed some light on how those resources are being put to work—but if history is any guide, we might not even have to wait that long.

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Does Gary Friedman want to take RH private?Dennis Scully is the host of the weekly BOH podcast, where he explores the changes and challenges facing the interior design community through interviews with industry thought leaders, entrepreneurs and creatives. He is also the vice president of sales and marketing at luxury textiles company Castel. Scully was previously a business development consultant for major trade brands, and has held sales and marketing roles at Domino, Waterworks and Twill Textiles. In his Market Watch columns, Scully calls upon his background as an analyst and long-time securities trader as he explores the ins and outs of the home industry’s publicly traded businesses.

Disclaimer: The author does not hold shares of the companies featured in this column at the time of the story’s publication. The views, thoughts and opinions expressed here belong solely to the author, and do not necessarily reflect those of BOH. The material is for informational purposes only, and does not constitute any form of financial advice.

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