Restoration Hardware Up 29% After Solid Q4, Buyback; Baird Says Fundamentals Still Challenged

But, Baird reiterates its Neutral rating given still-challenged fundamentals and uncertainty over the deployment pace of buybacks.

In Review

RH previewed preliminary results for the fourth quarter amid multiple charges related to product recalls and asset impairments. The company’s adjusted sales/EPS of $590 million/$0.68 were near the high end of $562 million–$592 million/$0.60–$0.70 plan. The EPS topped Street view of $0.65.

“While an in-line update is encouraging, recall 4Q guidance was reset materially lower in December, and overall results reflected still-challenged fundamentals (CBR likely down high-teens; adjusted EBIT -32 percent y/y),” analyst Peter Benedict wrote in a note.

Related Link: Restoration Hardware: A Potential Turnaround Is Imminent

Benedict also noted that the new $300 million buyback program should be prudently executed given $650 million of convertible bonds coming due in 2019/2020.

Rating, Justified

The analyst’s cautious stance comes despite the company has ample liquidity to fund share repurchases in the form of $281 million of cash/investments and an untapped $600 million revolver.

Meanwhile, Benedict raised his fourth quarter/FY 2016 EPS estimates to $0.68/$1.26 (from $0.66/$1.25), but held his FY 2017/FY 2018 EPS view at $2.10/$2.50.

“Odds for a recovery in margins/EPS seem good as certain unique P&L pressures are cycled, but visibility into the cadence of a potential top-line recovery remains less certain,” Benedict added.

At last check, shares of RH climbed 27.79 percent to $32.19. Benedict has a price target of $32.