Shares of Restoration Hardware Soar Following Results

Shares of Restoration Hardware Holdings, Inc. RH jumped more than 13.9% following the company's report on fourth quarter and fiscal year 2013 results.

Summary of Fourth Quarter Results

• Net revenues increased 26% and GAAP net revenues increased 18%.
• Adjusted operating income grew from $41.4 million to $58.3 million, up 41% compared with the 2012 fourth quarter.
• Restoration Hardware reported adjusted net income of $34 million and GAAP net income of $26.6 million.
• Adjusted diluted EPS increased to $0.83, up 38% on a comparable week basis. GAAP diluted EPS came in at $0.65.

Summary of Full Year Results

• Net revenues increased 33% and GAAP net revenues increased 30%.
• Adjusted operating income grew from $41.4 million to $58.3 million, up 41% compared with the 2012 fourth quarter.
• Restoration Hardware reported adjusted net income of $69.1 million, up 92% on a comparable week basis. GAAP net income came in at $18.2 million.
• Adjusted diluted EPS increased to $1.71, up 38% on a comparable week basis. GAAP diluted EPS came in at $0.45.

Guidance for 1Q14 and FY14

• Restoration Hardware is looking for first quarter net revenue to be within $345- $350 million. The company expects full year revenue to be within $1.825- $1.86 billion.
• Adjusted net income for the quarter and the year is expected to be within $3.7- $4.5 million and $87.6- $90.9 million, repectively.
• The company is looking for adjusted diluted earnings per share for the quarter to be within $0.09 and $0.11. EPS for the year is expected to reach $2.14 to $2.22.

Management and Analyst Comments

• Chairman and CEO Gary Friedman commented on the results noting, “Throughout fiscal 2013, we continued to take market share and outperform our expectations – delivering results that far exceeded the annual financial targets we introduced at the beginning of the year. We increased revenue by 32% in the back half of the year on a comparable week basis, roughly in-line with the 34% growth in the first half, despite the elimination of our Fall Source Book. During the fourth quarter of fiscal 2013, we increased comparable brand revenue by 24%, on top of 29% last year, in spite of a tougher than anticipated holiday selling season and the impact of weather on our retail business. Additionally, we increased adjusted net income 52% on a comparable week basis demonstrating the disruptive nature of the RH brand and the power of our multi-channel business model.”
• In regards to the company's forecast, Friedman added, “As we enter 2014, we remain focused on our two largest value driving strategies – the expansion of our offer and the transformation of our retail stores. The expansion of our offer will be highlighted across 3,200 pages in our Spring 2014 Source Books, positioning us for what we believe will be another year of industry leading results. In regards to the transformation of our retail stores, we believe we have a $4 to $5 billion Company trapped in billion dollar legacy real estate. Post the drop of our Spring 2014 Source Books, approximately 10% of our assortment will be displayed at retail. We believe the key to unlocking the value of the Company is to transform our real estate portfolio into our next generation Full Line Design Galleries. This year, we will open new Galleries in Greenwich, Los Angeles, and our first next generation Full Line Design Gallery in Atlanta. Additionally, we are significantly expanding the size our New York Gallery, adding two additional floors to our top performing store in the Company. We now have signed leases for five next generation Full Line Design Galleries and are in negotiations for an additional 25 locations. Once our real estate transformation is complete in North America, we believe we will deliver $4 billion to $5 billion in annual sales, achieve mid-teens operating margins, and generate significant free cash flow.”
• Wells Fargo analyst Matt Nemer remarked on Restoration Hardware's miss on fourth quarter revenue and net income due to challenging weather trends. Despite these misses, Nemer reported that “(1) Restoration displayed expense flexibility usually reserved for larger companies, and was able to keep SG&A dollars flat to FQ3 (leveraging 210bps) to adjust for the softer sales. (2) The FQ1 guide was well above the Street, and given the quarter is approximately two-thirds over, we believe the level of confidence is high. (3) The real estate transformation is on track, with 5 leases signed for 2014/2015 and 25 other active discussions. Some fine-tuning of the model also allows for 10-12% less square footage and the potential for improved returns. (4) The Spring source books will be “revolutionary,” 3,200 pages in 13 separate books (vs. 1,600 pages in 6 books last year), with a very unique new presentation, per the company, and mailed via UPS which allows for delivery notification and then highly relevant email follow-up.”