What Will It Take To Restore Restoration Hardware?

Despite a first quarter that saw comps up 9 percent, RH RH (formerly Restoration Hardware) has a long path to improvement, according to the latest report from UBS.

“The flowthrough on a decent top-line was not great. This trend will likely be maintained in the near term due to continued product liquidation as RH looks to improve its supply chain,” said UBS analyst Michael Lasser.

The company plans to invest in initiatives including hospitality, RH Teen and integrate Waterworks into its platform. While these moves could improve the company over the long term, UBS sees them as a lot of moving parts all at once, keeping the firm on the sidelines at current levels.

“While RH is investing for the long run, we think its future still remains a little uncertain,” said Lasser. “Its top-line growth has accelerated in 1Q, but this was mostly due to its SKU rationalization efforts. As such, it remains to be seen if RH can profitable grow its top-line as the year progresses. In addition, we wonder if the high-end Home Furnishings market is large enough to support its real estate transformation strategy.”

“RH’s profitability rate remains a key debate. Unless there is more certainty that it can get back the margin it lost last year, it’s tough to see the stock working meaningfully from here,” said Lasser.

UBS maintains a Neutral rating on Restoration Hardware with a $45 price target.

At time of publication, shares of RH were down 26.21 percent at $42.24.