Market Overview

Home Furnishing Stocks Look Attractive After Restoration Hardware's Strong Results

Restoration Hardware (NYSE: RH) hit a new 52-week high on Thursday after the company reported blow-out results for its fiscal first-quarter and lifted its full-year outlook.

In afternoon trade, the shares were last up better than 13 percent to just below $81.00.

After the big move in the name, the stock has now climbed more than 20 percent in 2014 and around 41 percent over the last 52-weeks. While Restoration Hardware appears to be hitting on all cylinders, the same can not be said for some of its competitors in the home furnishings segment. In particular, Pier 1 Imports (NYSE: PIR) and Ethan Allen (NYSE: ETH) have been struggling in 2014.

Nevertheless, the strong Q1 results from RH may be a signal that macro conditions are also improving for both Pier 1 and Ethan Allen. On a valuation basis, both of these names appear to be reasonably priced after stumbling in recent months.

Pier 1 shares have fallen around 25 percent in 2014 and the stock currently trades at a forward P/E of 17 and a PEG ratio of 0.90, which may suggest it is slightly undervalued. At current levels, PIR is also yielding around 1.40 percent. The company almost went bankrupt during the financial crisis, but has bounced back in a big way over the last 5 years with the stock surging more than 860 percent during that time.

Ethan Allen has also struggled this year, with the stock losing better than 19 percent. Similar to Pier 1, however, Ethan Allen has been a good performer on a longer-term basis, climbing 100 percent over the last five years.

For the current year, Wall Street analysts are projecting sales growth of just 1.50 percent, but this is projected to accelerate to almost 6 percent in fiscal 2015. The stock appears to be fairly modestly priced at current levels. Ethan Allen shares trade at a forward P/E of just under 15 and a PEG ratio of 1.

Value-based money management firm Gabelli & Co. initiated the stock at "Buy" on Monday and other value investors may be getting interested in the name, particularly in the wake of Restoration Hardware's impressive results.

For its fiscal-first quarter, Restoration Hardware reported net income of $1.8 million or $0.04 per share, compared to a loss of $0.2 million or $0.00 per share, in last year's corresponding period. On an adjusted basis, net income soared 200 percent to $0.18 versus $0.06 last year.

This easily topped consensus EPS estimates of $0.11. Sales in the quarter were up 22 percent to $366.25 million. This also easily exceeded Wall Street consensus revenue estimates of $347.73 million.

Although the company's first-quarter results were stellar, the real reason for the huge move in the share price on Thursday was Restoration Hardware's above-consensus guidance. For the second-quarter, the company sees adjusted EPS of $0.62 to $0.64 on revenue of $443 million to $453 million. This compares to current Q2 consensus estimates calling for EPS of $0.61 on revenue of $452.11 million.

For the fiscal year, Restoration Hardware guided for adjusted EPS of $2.24 to $2.30 on revenue of $1.86 billion to $1.89 billion. The updated guidance is well ahead of current consensus calling for EPS of $2.20 on sales of $1.85 billion.

All three of these companies, Restoration Hardware, Ethan Allen, and Pier 1 Imports, rely to a large extent on the health of the U.S. economy and the housing market, in particular. Although indications have been mixed regarding the current health of the housing market, the long-term trajectory has been up.

While more month to month volatility on the housing front is likely, investors who buy into home furnishing stocks at current levels should continue to do well over the longer-term.

Posted-In: Analyst Color Long Ideas Intraday Update Analyst Ratings Movers Trading Ideas

 

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