Home furnishings seller Restoration Hardware, now known simply as “RH,” will soon break ground on a new Corte Madera store and restaurant combination that exemplifies the company’s strategy and the daring but risky bets it’s making on the future of high end retail.

The Town of Corte Madera has approved nearly every aspect of the company’s proposed “RH Gallery” building at the north end of the Village shopping center adjacent to Highway 101, and on June 4 the town council will likely approve the last bits of the application required – two permits to move more than 1,000 cubic yards of soil during construction – according to Corte Madera Senior Planner Phil Boyle, who’s worked three years on the project.

Alexandra McClure, a spokeswoman for RH, declined to comment on the Marin County project, but statements made in company filings and analysis by outside watchers indicate the 18,633-square-foot building, which will include a fancy restaurant on the top floor, is another big step forward in RH’s quest during which it has taken on nearly $600 million in debt to transform itself into a high end “destination” retailer.

Selfies and wedding bells

Following on the success of a similar store-restaurant combination opened in Chicago late in 2015, Restoration Hardware, led by CEO Gary Friedman, a veteran of Gap Inc. and Williams-Sonoma Inc., made last minute changes to the design of the Corte Madera store based on the performance of that Chicago RH Gallery. In March, RH told Corte Madera it wanted to shrink the store’s “footprint” from the already-approved 24,355 square feet and to move the restaurant from the ground floor to the third floor.

Corte Madera approved those changes in April, said city planner Boyle, who noted that all the proposed alterations came from the company, based on analysis of customer traffic patterns at the Chicago location. According to company SEC filings, the restaurant at the Chicago store had $5 million in sales in 2016, and more than 50 wedding proposals were made at the store. RH said the Chicago eatery was “the 7th most Instagrammed café in the country” in 2017.

Restoration Hardware opened two other stores based on the Chicago model in 2017, one in Toronto and another in West Palm Beach, Fla. Another RH Gallery complex opens next month in Nashville. The Corte Madera complex is slated for completion late in 2019, based on a July start date for construction, said Boyle.

RH’s existing store at the Village mall is about 8,815 square feet, far less than half the size of the proposed RH Gallery, showing how serious the company is about throwing out its old retail strategy and reinventing itself.

CEO Friedman has led the charge to reinvent RH’s retail strategy, moving away from the company’s phone-book-sized mail order catalogs, which rivaled the “Vogue” September issue in weight, and its smaller stores enclosed inside malls. Friedman has overseen the adoption of a premier membership model, where frequent customers can pay $100 a year to get discounts on big purchases as well as other perks.

Restoration Hardware, or Restaurant Hardware?

But will people who visit a store or restaurant to propose marriage or to eat a good meal end up buying furniture there, too?

Is “buzz” on social media something that translates automatically into better sales? That’s a question many retailers have struggled to answer.

RH reported higher sales in the quarter ended Feb. 3 – $670.3 million, up from $586.7 million a year earlier. But its profit fell to $261,000 for the quarter, down from $9.4 million a year earlier, dragged down considerably by a write off of $33.7 million in goodwill related to its 15-store Waterworks business, which RH bought two years ago for $117 million.

Although RH says its West Palm Beach restaurant “is on track to exceed $7 million” in sales this year, that revenue seems in some ways to have been a fortunate accident, according to statements in company regulatory filings.

“We never had a goal of opening high volume restaurants but rather provide an amenity for our clients who spend hours in our showrooms designing their homes,” RH said in its latest quarterly report.

And there’s the rub, said Cristina Fernandez, a senior analyst at New York’s Telsey Advisory Group who follows RH but has no position in the company’s stock.

“They have a good strategy, and they’ve been executing better,” said Fernandez. “But their industry is very volatile.”

Changes to tax laws that haven’t hit homeowners hard yet in states like New York and possibly California could take a big bite out of the number of shoppers who spend hours with an interior designer in an RH store. The effects of those tax changes are still unclear, she said.

Overall, however, Fernandez noted several positive aspects of RH’s changing strategy, particularly the adoption of the membership program, which has smoothed out seasonal fluctuations in sales and allowed the company to ditch periodic marketing programs, which required a lot of creative effort throughout the year.

“The used to run a lot of friends and family promotions and their sales were very volatile,” Fernandez said. “They wanted to get away from thinking about what promotions to run.”

She also said the company’s push to buy back a lot of its shares over the last few years – another controversial crusade led by CEO Friedman – did benefit the company, despite the debt it took on to make it happen.

“It was important last year from a stock perspective,” she said. “Their shares now trade around $100; last year they were in the $30s.”

But share price isn’t the same as company performance, and RH has two big debts coming due – $314.5 million due in 2019 and another $239.9 million due the following year – and they weigh heavily on its balance sheets.

The company, according to SEC filings, counts on “forecasted free cash flow in excess of $250 million in 2018” to repay those debts, which have already left it with just $17.9 million in cash and near money as of Feb. 3, down from $87 million a year earlier.

Building more standalone stores rather than leasing space in existing malls should also help its cash flow, the company said. It has gallery-type developments under construction now in Yountville in Napa County and in Minnesota, with five others planned.

“We believe … we are creating a customer experience that cannot be replicated online,” RH said in its quarterly report. It also said, in a nod to the audacity of its gamble, that most of the aspects of its retail strategy “are all in direct conflict with conventional wisdom.”