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To Watch Restoration Hardware Grow, Look in Your Mailbox

A commenter on yesterday's story ("Pick the Next Dead Retail Spin-Off") asked whether Restoration Hardware might be opening another brick-and-mortar store brand, even as its sale to private equity firm Catterton Partners was approved by shareholders on Thursday. After reading a whole bunch of SEC filings, I'm confident guessing that Resto's line extensions -- including a stylish offering called Brocade Home -- will reach only as far as mailboxes and Internets in the foreseeable future.

Catterton Partners lead a coalition of investors that will take Restoration private next week for $167 million, after a protracted period of due diligence during which Edward Lampert and Sears Holdings kicked the tires, took a 14 percent stake, held some meetings, made some demands, then stopped returning phone calls. For a detailed look at how a private-equity deal happens, read Restoration Hardware's transaction statement, Sched. 13-E3. The "background of the merger" section, which describes a process that began in April 2007, runs 32 pages and makes Sears Holdings look pretty darn flaky.

So what is Catterton buying? Restoration has lost money or broken even for the last few years; net loss from operations in the first quarter of fiscal 2008 was $17.7 million. After a poor holiday showing, the merger offer fell from $6.60 to $4.50 a share. Meanwhile, it's invested heavily in remodeling stores and launching new catalog category extensions. Along with Brocade and RH Baby & Child, new catalogs went out in 2006 and 2007 in outdoor, gift, and bed/bath; a trade division launched this year). It leased a new distribution center, upgraded inventory management software, and opened eight outlet stores to improve both ends of the supply chain.

Direct-to-consumer revenues rose 21 percent last quarter, while sales in its 102 stores and eight outlets fell.

Brocade Home was developed and launched in fall 2007 by Lisa Versacio, who was poached in 2006 from Williams-Sonoma, where she spearheaded the West Elm line. West Elm merchandise is sinuous, modern, and minimalist; Brocade Home is more luxe and elaborate than either West Elm or the classic quarter-sawn Restoration look. Both are more design-y, feminine, and intended to skew younger than either of their parent companies' classic offerings.

Although Brocade Home was envisioned as a multichannel brand, it's sold by catalog and online for now. Versacio told, "We are looking forward to bringing Brocade Home into a physical space at some point soon." Restoration's other new brand, RH Baby & Child (pink and chocolate brown, blue and chocolate brown, sage and chocolate brown), is also an online/catalog play, although its website promises merchandise "in select stores" by November 2008.

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