Restoration Hardware Sales Shift To Catalog? Is That A Good Thing?

Direct Magazine wrote a brief story about sales shifting from "retail to catalog" at Restoration Hardware (RSTO). Here is the story they shared with you, quoted word-for-word:

• Restoration Hardware Inc. has reported that a significant share of its revenues have shifted from retail to direct marketing sales.

  The company reported direct marketing sales for the third quarter that ended Nov. 3 were $97.2 million, an increase of $16.6 million compared to the same quarter last year.

  Restoration Hardware generated 56% of total revenues from its catalog in the third quarter this year, compared to 36% during third quarter of 2006.

  The Corte Madera, CA-based firm attributed the shift to greater direct sales to increased catalog circulation and adding more pages to catalogs.

  It reported $76.5 million in revenues for its stores in the third quarter.

Wow! They must really be doing great, huh?

Let's see what was omitted from this report from Direct Magazine. Compare with a statement written by PR Newswire, via Excite:

• EBIDTA was a loss of $15 million in Q3-2007, vs. a loss of $5 million in Q3-2006. In other words, Restoration Hardware lost 3x as much money in a quarter where "catalog" sales increased dramatically.

• Direct-to-Consumer (Catalog + Internet) sales were 56% of total ... Direct Magazine quoted that 56% of the sales were Catalog. Ugh.

• SG&A rose 4.1%, as the direct-to-consumer channel has a higher expense rate than the retail channel. In other words, sales shifted to the direct-to-consumer channel, where less sales flow-through to profit than in the retail channel. Also, pages circulated increased, adding to marketing expense.
  

If you're reading Direct Magazine, you learn that catalog results were great!

If you're reading the actual comments from management, you learn that direct-to-consumer (catalog + online) sales increased, but more marketing dollars were spent to cause this shift, and it required more operational expense to process the sales, in-part leading to a dramatic decrease in profit of $10,000,000 in the quarter.

Also, if all those multichannel pundits are "right", why didn't all this catalog marketing, all of this paper in the mail, cause retail sales to increase dramatically? I thought paper drove sales in retail stores? Isn't that what we're told, over and over and over?

Retail sales were down 24% vs. last year's third quarter.

What do you do to filter the content you read via trade journals and vendors, or do you filter the content?

Restoration Hardware

Multichannel merchant Restoration Hardware announced plans to reduce corporate staffing levels by about one hundred souls.

Restoration Hardware lost more than thirteen million dollars during the first quarter, compared with a loss of four million dollars in the first quarter last year.

Buried in the 10-Q statement for the first quarter were interesting quotes about a shift in retail sales to the direct channel. Restoration Hardware increased catalog pages circulated by more than forty percent. This resulted in a thirty-eight percent increase in catalog/online sales.

Management blamed an eight percent reduction in retail sales on the fact that the catalog strategy had a broader merchandise assortment than was offered in retail stores, causing customers to shift spend from the retail channel to the online channel.

If you subtract the retail difference from the direct channel, you'll see that the direct channel increased by about twenty percent, on a forty percent increase in pages circulated. These figures suggest that it is possible that the catalog merchandise assortment cannibalized retail sales.

For the most part, I've observed that online/catalog customers will migrate to the retail channel, but retail customers are generally unwilling to migrate online, or to order over the telephone.

But when the merchandise assortment changes, you throw those rules out the window. You've given the customer a reason to change behavior.

These are real-world issues that multichannel pundits struggle to offer solutions for.

Whether the two are correlated or not, it is clear that sub-optimal earnings performance coincided with a significant multichannel strategy shift to the catalog channel. This strategy may work, and may be the right strategy for the customer.

For one hundred employees who helped implement the multichannel strategy at Restoration Hardware, the outcome isn't so positive.