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Restoration Hardware CEO Gary Friedman's Luxury Retail Ambitions


CEO Friedman in RH’s (formerly Restoration Hardware’s) Corte Madera (Calif.) headquarters

Photograph by Jake Stangel for Bloomberg Businessweek

CEO Friedman in RH’s (formerly Restoration Hardware’s) Corte Madera (Calif.) headquarters

“These are the original antique library chairs that are in our catalog. Those are the original antique tables that we have replicated,” says Gary Friedman as he walks briskly through his home in California’s Marin County, passing low-slung brown leather chairs and unpolished wood tables. Friedman is the public face of RH (RH), formerly known as Restoration Hardware, and its guiding spirit. He has many dreams for RH, but the essential one is “to create an endless reflection of hope, inspiration, passion, and love that will ignite the human spirit and change the world.” That’s the company’s vision statement.

Friedman’s official title is chairman, chief executive, creator, and curator. He has an official moneymaking philosophy, too: “You have to find people who believe what you believe,” he says. “If they believe in your taste, style, the way you do things, you can create an incredible business.” He wears a brown woven bracelet with the word Believe. So do some employees.

Friedman, 56, is also wearing slim-cut khakis, shearling-lined high-tops, and a slate blue cashmere hoodie. He’s cheery and perpetually tanned and stubbled, and he drinks raw coconut water most mornings. His villa has views of the Golden Gate Bridge from almost every room, an architectural feat that required the builders to remove 330 truckloads of dirt from the site. The interior, designed by Friedman and his former wife, consolidates everything RH aims to be. The company no longer sells Quakenbush nut bowls, Boston Ranger pencil sharpeners, or anything else meant to evoke a simple, virtuous American past. It summons the elegance of a salvaged estate: perfectly worn, possibly haunted dining tables, English club chairs in taupe linen, Italian gas streetlights. Friedman’s house is all neutral colors, unfinished wood, distressed leather, and Belgian linen. Flowers have to be green or white; books in his library are supposed to be cream-colored.

When Friedman joined Restoration Hardware from Williams-Sonoma as CEO in 2001, the company was near bankruptcy. Now his ambitions for it are vast and expensive. Friedman is planning grand stores in high-income Zip Codes across the country. So far the response from customers and investors has been enthusiastic; sales have been growing more than 20 percent a year since 2010, shares are up 50 percent in the past year, and analysts expect it to be profitable this fiscal year.

Jake Stangel for Bloomberg Businessweek

RH’s store in Boston, which opened last April, is set in an 1862 Beaux-Arts building originally constructed for the Museum of Natural History. It is four stories and 40,000 square feet, with fully staged bedrooms and living rooms and dining rooms, a library, cinema room, billiard lounge, nursery, and conservatory. A glass elevator modeled after one built in 1893 moves between the floors. There is a 24-foot-tall steel replica of the Eiffel Tower (found in a flea market and not for sale) and a vintage lightbulb tester that’s been turned into a minibar ($1,995). The cash registers are hidden in cabinets. The store is three times as large as RH’s older one in Boston, and if it does as well as the first luxury stores, it could have sales per square foot that are three times as high.

Other stores will be even bigger, with wine bars and restaurants, performance spaces, courtyards, and rooftop gardens. All will have free valet parking. RH says average sales could be $30 million a year per store. “No one has ever built stores like this,” Friedman says. RH has opened five so far and will eventually open 60 to 70 in North America, replacing its 62 existing ones. Friedman calls them “design galleries.”

Retailers are struggling to find ways to bring more people into their stores. “I wish more of them were doing things like this,” says Matt Nemer, an analyst at Wells Fargo Securities (WFC).

Friedman opened an RH contemporary art gallery in Manhattan last November and says he’ll introduce an RH guesthouse in the city by 2016. He’s started a small music label that’s signed three groups. He’s announced RH Atelier, a clothing and jewelry line, and RH Antiques and Artifacts, a collection of one-of-a-kind pieces. Much of the money for these projects will come from RH’s advertising budget, says Friedman. “Even if art never becomes a very big business, but it renders the brand more valuable, that’s what you want to do with marketing, right?” he says.

The timing of RH’s experiment seems fortunate so far: Many companies doing well these days cater to increasingly affluent customers. Friedman has a reputation for getting people to buy what he’s selling. He’s the one who put working kitchens in the center of Williams-Sonoma (WSM) stores, changing how Americans shop for pots and pans. He also turned Pottery Barn into the Gap of home furnishings, offering reasonable design at affordable prices. “He’s a creative genius. He is that guy,” says David Strasser, an analyst at Janney Montgomery. “Either you believe the transformation makes sense or you don’t. So far the evidence is that it’s pretty powerful.”

“It took Steve Jobs about 10 years to get his job back. … It took me about 10 months”

This is Friedman’s second turn running Restoration Hardware. In August 2012 the company announced that he was resigning as chairman and chief executive. It later stated that he departed after an investigation into an inappropriate relationship with an employee. Filings with the Securities and Exchange Commission are admonishing but not specific: “The investigation concluded that Mr. Friedman engaged in activities that were inconsistent with the board of directors’ expectations for executive conduct as previously communicated by the board of directors and failed to comply with certain Company policies.” Friedman was kept on as an adviser. In November 2012 the company went public, as it had planned, and raised $124 million. Eight months later, in July, Friedman rejoined the company with all his titles intact. “It took Steve Jobs about 10 years to get his job back at Apple. It took me about 10 months,” he says.

Even without the potential distraction of misbehavior, transformation on the scale that Friedman is attempting is perilous. “His strategy is exciting but scary,” says Brad Thomas, an analyst at KeyBanc Capital Markets. “Can Gary remain disciplined and focus on the things that matter most to the business? We think he can. But that’s one of the biggest risks.”
 
 
Friedman grabs a few slices of prosciutto as he nears a rough-hewn wood table set for lunch. The cheese is in broken-off chunks: He likes some things to seem random. The vice president of the RH public-relations and marketing group—Friedman renamed it “the truth group” last year—sits down, too. She barely has to say a word.

He grew up in San Francisco and Sonoma. His father died when he was 5, and his mother, he says, battled mental illness, was often hospitalized, and sometimes was on food stamps. A slight kid with reading problems and a spectacular visual memory, he spent a year at Santa Rosa Junior College, dropping out after a counselor said he was wasting taxpayers’ money.

Friedman had already found a job at the Gap (GPS). He started in the stockroom in 1977, moved into sales, and soon became the youngest store manager. “They used to call me Gary Gap because I would volunteer for everything,” he says. “I was in all the sales training filmstrips.”

That enthusiasm helped Friedman come to the attention of Mickey Drexler, who was then running Gap. “My whole education in the business happened during those years,” says Friedman. “Mickey used to call me his best knockoff.”

“There’s a short list of people who have done what Gary has,” says Drexler, who was briefly on the board of Restoration Hardware before Friedman arrived. “He’s broken a lot of rules and built his business in a very creative way.” Drexler cautions, though, that discipline is just as important as vision. “One thing I’ve learned about being successful is to stay focused. The other: We have to remember it’s not all about us.”

Friedman had thought he would be president of Gap one day, but when he ended up with a boss who he says didn’t like him, he left for Williams-Sonoma. There he introduced the grand cuisine store, with a food hall and tasting bars and a kitchen in the middle. He reinvented the company’s unprofitable Pottery Barn stores, too, by selling color-coordinated furniture and accessories in addition to tableware in larger, fancier stores. “Pottery Barn became the fastest-growing, most successful lifestyle home furnishings company of its kind. In the world,” he says. Hyperbole has often served Friedman well; that said, Pottery Barn’s sales did increase dramatically when he was in charge.

He became Williams-Sonoma’s president and chief operating officer in 2000 and thought he would become chief executive. But the job went to an outsider in 2001. The board’s decision “broke my heart,” Friedman says. “I mean, you have no idea. It was as bad a heartbreak as any love I’ve ever had.”

Restoration Hardware was founded in 1980 by Stephen Gordon, who had a couple of degrees in psychology and a talent for mining his childhood memories and aspirations. The chain was best known for its quirky, nostalgic goods. It also sold classic American furniture that would fit nicely in a private men’s club. David Brooks described it as “dense with Zeitgeist” in a New Yorker story in 1999; later he called its customers “Bobos in Paradise.”

In 1999, Friedman also took an interest in Restoration Hardware. He wanted to combine it with Williams-Sonoma, but the Williams-Sonoma board declined to make a bid for the public company. During the next two years, Restoration Hardware expanded quickly and struggled with distribution. By 2001, when Friedman was thinking of leaving Williams-Sonoma, Restoration Hardware was desperately short of cash. Gordon stepped aside, and Friedman became chief executive. He invested $4.5 million and helped raise millions more.

“Gary had a vision for the company from Day One,” recalls Bonnie Orofino, who had joined Resto, as employees call it, in 2000 as chief merchandising officer, a position she holds today. “He said we’re going to travel the world, redo the entire assortment, build core businesses, remodel every store, and relaunch with a new catalog.”

Restoration Hardware’s sales grew—by 27 percent in its best quarter—but it had just two profitable years amid the prosperity of the mid-2000s. By 2007, as the housing market was falling apart, Friedman cut 40 percent of corporate staff and got board approval to take it private. He struck a deal with Catterton Partners and Tower Three Partners. After fighting off a hostile bid by Sears (SHLD), they bought out the company for $177 million just months before the economy came crashing down. In December 2008, investors put in $50 million more. “It was struggling financially, but it had an incredible nugget of vision and design,” says Deborah Ellinger, whom Catterton brought in as president for the first year.

Competitors such as Linens ’n Things closed their stores. Others, such as Pottery Barn and Pier 1 Imports (PIR), cut prices. “I said if we’re going to go down, let’s go down in style,” says Friedman. “We were moving to a premium, luxury positioning. So we just went there faster.” As Friedman put his go-for-broke strategy into place, Ellinger brought discipline to the company. “My job was to help find the right compromises,” she says.

Restoration Hardware’s aesthetic became more European, more reclaimed and weathered: Instead of a comfortable leather lounge chair with a footrest, there’s a Versailles burlap-backed chair inspired by the 18th century court of Louis XV. Friedman and his executives traversed the globe looking for furniture and objects to reproduce and artisans who could help. “We realized we shouldn’t be designing,” says Orofino. “It made more sense to go to the people who know how to craft something better than we do.” Friedman figured he could set up partnerships with the craftsmen who were manufacturing small batches of furniture for high-end interior decorators and design showrooms, help them scale up, and sell the pieces for less than competitors. “We’re curating people, products, ideas, inspiration. We edit them, and they become exclusively ours,” he says.

Courtesy RH

Thus emerged the Deconstructed French Victorian chaises ($1,995-$2,680), Vintage Birdcage chandeliers and Foucault’s Orb crystal chandeliers ($3,625 and $4,695, respectively, for the largest), reproduction antique French library bookcases ($995-$1,195), and distressed wood tables inspired by ones in an 18th century Belgian monastery ($1,995 for the smallest). “RH is a singular vision. Everything there is going through a filter, a Friedman filter,” says Evan Cole, a longtime friend of Friedman’s who once ran ABC Carpet & Home in New York and now owns the high-end furniture emporium HD Buttercup in California.

Toward the end of 2009, Ellinger left the company for personal reasons, she says, and Restoration Hardware needed a president with the same operational and financial expertise. Carlos Alberini, the president of Guess? (GES) in Los Angeles, had both. He also knew Friedman. Alberini was intrigued by the opportunity but told Friedman he didn’t want to leave Guess without getting a promotion. Friedman made him an unusual offer: They became co-chief executives in June 2010.

Both say they forged a close friendship. In Friedman’s bathroom, on a shelf above the sink, sits a burnished silver plaque. It reads, “What would you attempt to do if you knew you could not fail?” Alberini says he had the same plaque on his desk for years. “We see life the same way. We talk about everything. It’s like working with my best friend.” When they send e-mails and texts to each other, they end with “All in ’til the day that I die” and a smiley face.

In 2009, Friedman gave DeMonty Price, the head of the stores, the additional title of chief values officer. Price’s role is to hold his peers accountable to Friedman’s credos. Among them: “Think until it hurts, until you can see what others can’t see so you can do what others can’t do.” Store managers hold a call every Monday morning to review operational matters. Price added a 30-minute leadership lesson afterward. “I may ask, ‘What are you most proud of?’ Or, ‘How are you executing on your vision?’ ” he says. There’s a daily values meeting at headquarters as well.

Friedman had already gone some way toward instilling in the company his can-do ethos. At yearly leadership conferences people sign a contract that says, in part: “I will continuously destroy my own reality to create tomorrow’s future for myself and my teammates.” There’s a ceremony, too. “People come up to the front of the room and explain why they signed the contract,” says Alberini. “Some would say, ‘I feel I let myself down this past year. I didn’t live by the values. This is where I failed.’ It gets very emotional.”

Friedman also created the five Resto Rules. “If you want to be a part of our culture, they are not optional,” says Price. They include Resto Rule No. 1: Vision is everything. Rule No. 2: Love us or leave us. No. 3: This is personal. Friedman elaborates: “We say, ‘This is not our job. This is our life.’ Some people say, ‘Oh, don’t take it personally.’ We say, ‘Those people are not our people.’ ”
 
 
By the spring of 2012, the plan to open grand galleries was under way. Friedman and Alberini had overseen the creation of stores in Los Angeles and Houston and were near completing a 30,000-square-foot store in Scottsdale, Ariz. The company’s revenue had grown about 24 percent each of the past two years. It was expanding its collections of babies’ and children’s furniture in standalone stores as well as outdoor and garden furniture in its galleries. It was introducing furniture for smaller spaces, tableware, and “objects of curiosity,” ranging from journals that look as if they were aboard the HMS Beagle to reproductions of enormous railway station clocks. The catalogs were thick and lush and were now called source books. The luxury economy was strong. RH’s private equity owners decided it was time for an initial public offering.

Then, in August, Friedman resigned as co-chief executive and chairman, and in October the company confirmed it was because of the consensual relationship he had with a female employee. She had left RH. Her former boyfriend was making threats, says Friedman, and “we didn’t need someone out there creating bad publicity.” After the company went public, Friedman’s 16 percent stake was worth $138 million, according to data compiled by Bloomberg.

Friedman retained the titles of creator and curator. He worked in the office every day. His picture and musings were on the first page of the catalogs. “We tried to keep everything intact while respecting the new lines of authority,” says Alberini, who became sole CEO. “We were counting on him coming back.” In July 2013 the board reappointed Friedman chairman and co-CEO. Friedman says that he and the woman are no longer involved, though they remain friendly. “In some ways I don’t even remember it happened,” he says of his resignation.

In mid-December, Alberini announced he was leaving RH to run Lucky Brand. He remains on the RH board. In an SEC filing regarding Alberini’s resignation, RH said it spent $4.8 million on the investigation into Friedman’s relationship and restated as one of its risks: “There can be no assurance that we will not incur expenses or claims in the future related to the conduct that was the subject of the investigation or similar conduct that has occurred in the past or, given Mr. Friedman’s continued involvement with the Company, may occur in the future.” Friedman says that’s “lawyer language—‘we don’t know what we don’t know.’ ” He adds: “Don’t read anything into it concerning my behavior.”

“I really don’t care about any of this,” says Nemer at Wells Fargo. “That he came back tells you that he’s a brilliant merchant. If that weren’t the case you could see this playing out in a different way.”

Thomas of KeyBanc points out that Friedman now owns about 6 percent of RH’s stock, valued at more than $100 million, and is the largest individual investor. “There is certainly pressure on the board to be extremely vigilant about Mr. Friedman’s behavior. They cannot afford to be fooled again,” says James Post, a governance expert at Boston University School of Management. He also notes that “financial distress at the company would make everyone look more closely.”

In late March, RH will announce sales for the fiscal year ended Jan. 31. They could be around $1.6 billion, according to analysts surveyed by Bloomberg, which would mean growth of almost 32 percent from the year before. Cash from operations is expected to be $14.6 million and expenditures $92 million, about half of which the company says is devoted to the RH galleries.

At a meeting in late January at the RH Center of Innovation and Product Leadership, otherwise known as company headquarters, Friedman is whistling The Girl From Ipanema as he sketches over blueprints for a new gallery. The 11-building RH Center in Corte Madera, Calif., has 120,000 square feet of offices, conference rooms, concept rooms, space to review samples, a mock store, a website production studio, and a photo studio for the catalogs. “I can walk through and see everything we are working on in one hour,” he says.

By the end of this year, Friedman expects to have opened a store in a 1917 post office in the moneyed enclave of Greenwich, Conn., one on Melrose Avenue in Los Angeles, and a six-story, 50,000-square-foot building on two acres on Atlanta’s Peachtree Road. It will have a courtyard and a reflecting pool. There will be outdoor kitchens and fireplaces as well as a wine bar. It will be gated. “You should feel like you’re on an estate,” he says.

Friedman says RH is able to build such extravagant stores because it’s not funding them entirely on its own. “Landlords and developers are actually helping us build these new structures,” he says, because of RH’s performance so far and the hope that the stores, with their Bellini bars and more, will bring in customers who browse the mall or other nearby retailers. “In many cases, we’re building stores that are 8 to 10 times bigger than our existing stores and paying very little more rent. And we know that products on display in our stores sell 50 percent to 150 percent better. It’s the most magnificent business proposition ever in the history of my career,” he says. “Seriously, in my entire career I’ve never seen a model like this. Never.” He calls it new math. “I think it’s hard for people to wrap their heads around because …” Because it’s too good to be true? “Right, exactly. But there’s no catch.”

Susan-berfield-photo-200x200
Berfield writes about retailers, restaurants, and other consumer companies for Bloomberg Businessweek. Follow her on Twitter @susanberfield.

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Companies Mentioned

  • RH
    (Restoration Hardware Holdings Inc)
    • $88.46 USD
    • 1.59
    • 1.8%
  • WFC
    (Wells Fargo & Co)
    • $51.18 USD
    • -0.11
    • -0.21%
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