Restoration Hardware Q1 Earnings And Revs Beat - Analyst Blog

Restoration Hardware Holdings, Inc. RH began fiscal 2014 on a remarkable note as its adjusted earnings of 18 cents a share grew threefold year over year. The adjusted earnings comfortably beat the Zacks Consensus Estimate of 10 cents and exceeded the company's guidance of 9–11 cents a share. Shares of this home furnishing retailer shot up 14.9% in the after-market trading session yesterday.

Taking one-time items, GAAP earnings came in at 4 cents a share, higher than breakeven results last year.

The bottom line was driven by a robust 22% surge in the company's net revenues of $366.3 million. Net sales not only surpassed the Zacks Consensus Estimate of $346.0 million, but also came ahead of the company's predicted range of $345–$350 million.

Restoration Hardware's comparable brand revenue growth, including direct revenues, went up 18% year over year. Further, the company's direct revenues came in at $176.4 million, up 24% year on year.

Gross profit escalated 22.1% to $124.3 million with the gross margin expanding 20 basis points (bps) to 34%. The company's adjusted operating income for the quarter soared to $14.0 million from a paltry $4.6 million in the year-ago quarter, while margin expanded 230 bps to 3.8%.

Store update

At the end of the first quarter, the company operated 69 retail outlets, including 61 galleries, 3 baby and child galleries, 5 full line design galleries and 17 outlet stores all over the U.S. and Canada.

Balance Sheet

The company ended the quarter with cash and cash equivalents of $10.9 million, merchandise inventories of $483.5 million and total shareholders' equity of $542.2 million.

Outlook

Management seems highly impressed with the company's first-quarter performance despite eliminating the mailing of Fall 2013 Source Book. The solid results coupled with its leading position in the home furnishings industry and multi-network business model make Restoration Hardware more confident about its future prospects.

Going forward, the company plans to maintain its focus on transforming its retail outlets and expanding its product portfolio, with the latter taking a leading edge from its 2014 Source Books.

In fiscal 2014, the company plans to introduce new Galleries in Greenwich, Los Angeles and also intends to open its first next generation Full Line Design Gallery in Atlanta. Further, it aims to increase the size of New York Gallery – its best performing outlet, by adding 2 more levels to it. Restoration Hardware has already finalized lease contracts for 6 of its next generation Full Line Design Galleries and is in the process of doing the same for 25 more.

The company believes that subsequent to its real estate transformation in North America, it will record annual sales of $4–$5 billion, generating operating margins in the mid-teens and producing adequate free cash flow.

Taking cue from these encouraging statements, Restoration Hardware upgraded its outlook for fiscal 2014. It now expects net revenues to range from $1.86–$1.89 billion, compared with $1.825–$1.86 billion predicted earlier. Moreover, it anticipates adjusted earnings per share to lie in the band of $2.24–$2.30 per share, up from $2.14–$2.22 forecasted earlier. The current Zacks Consensus Estimate for fiscal 2014 stands at $2.21 a share, within the company's guided range.

Also, Restoration Hardware initiated guidance for the second quarter of fiscal 2014, wherein it expects revenues to be within $443.0–$453.0 million and adjusted earnings in the band of 62–64 cents per share. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is pegged at 61 cents per share, which may be revised upward.  

Other Stocks to Consider

Currently, Restoration Hardware carries a Zacks Rank #2 (Buy). Other players in the home furnishings industry, which look attractive at current levels, include Haverty Furniture Companies Inc. HVT, Kirkland's Inc. KIRK and Williams-Sonoma Inc. WSM. All these stocks carry the same rank as Restoration Hardware.
 

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