Market Overview

Restoration Hardware Soars to New All-Time Highs on Q1 Results

Restoration Hardware Soars to New All-Time Highs on Q1 Results

High-end home furnishings and furniture retailer Restoration Hardware (NYSE: RH) released its fiscal first-quarter earnings results on Thursday after the closing bell. The company posted earnings and revenue that topped Wall Street estimates and also raised its fiscal year outlook.

On Friday, the stock surged to new all-time highs nearing $70 in the wake of the news. At last check, Restoration Hardware shares were up 18 percent and trading at $69.58. The company, which has only been on the public markets since November 2012, is certainly one to watch in the retail sector.

Since going public at $24.00 per share, the stock has already jumped nearly 192 percent. Restoration Hardware's most recent earnings report underscores the operating momentum at the Corte Madera, California-based retailer, and this is a name that investors should keep a close eye on going forward. One of the key drivers in Restoration Hardware's strong performance has been a recovery in the housing market.

Management Commentary

Speaking about the company's strong first-quarter report, CEO Carlos Alberini said “We are extremely pleased with our first quarter performance and financial results. During the period, we delivered an increase in net revenues of 38%, comp store sales growth of 41%, and a significant improvement in profitability as we continued to invest in our infrastructure and new businesses to support our growth.”

Mr. Alberini also said that the company has been receiving favorable lease terms that "are typically available only to anchor tenants in several of the most prestigious shopping centers in North America." According to the CEO, these less expensive terms will help drive Restoration Hardware's financial results going forward. "We believe that over time, these new deals will enable us to deliver higher sales and increased earnings, reduce our capital investment, and achieve higher ROIC."

Restoration Hardware also announced plans for two new business lines -- RH Kitchen and Tableware and RH Antiquities. Gary Friedman, Chairman Emeritus, Creator and Curator said, "RH Kitchen and Tableware provides another logical opportunity for growth as we expand beyond our initial tableware offering and create a curated collection of kitchen furniture, appliances, lighting, cookware, tools, and food. RH Antiquities will provide an opportunity to fill current customer demand with a curated collection of antiques as we enter this $25 billion highly fragmented market. These new businesses will further enhance our brand position and provide meaningful long-term growth opportunities."

First-Quarter Financial Results

For the fiscal first-quarter, Restoration Hardware reported a net loss of $0.16 million compared to $3.73 million in last year's first-quarter.

On an adjusted basis, which is comparable to analysts' consensus, the company reported earnings of $2.3 million or $0.06 per share. This came in ahead of Wall Street earnings per share expectations of $0.04.

Sales in Q1 were $301.34 million, a 38 percent rise from the $217.91 million that Restoration Hardware reported last year. This also came in ahead of analysts' consensus revenue estimates of $299.13 million.

Q2 and Full-Year Guidance

For the second-quarter, the retailer delivered guidance that was substantially ahead of the Street, particularly on the top-line. Restoration Hardware sees adjusted EPS of $0.40 to $0.42 on sales of $375 million to $380 million. This compares to current consensus of $0.39 on sales of $354.83 million.

For the full-year, the company lifted its outlook. Restoration Hardware now sees adjusted EPS of $1.41 to $1.47, which is well ahead of its previous guidance range of $1.29 to $1.37. Currently, analysts have consensus EPS estimates of $1.40.

Sales are expected to be between $1.47 billion to $1.51 billion. This is also at the high-end of analysts' expectations calling for full-year revenue of $1.48 billion.

Trading Outlook Going Forward

Restoration Hardware's first-quarter report certainly appears to be an inflection point in terms of the company's operating outlook. Unfortunately, shares have staged a tremendous rally since mid-April and a lot of the good news appears to be priced into the stock. On April 18, Restoration Hardware was trading at $32.75 and over the last 3 months, the shares have rallied almost 82 percent.

As a result of the big move in the name, valuation is currently quite high. Restoration Hardware trades at a forward P/E above 40 and a PEG ratio of 1.84. Nevertheless, this could turn out to be a momentum name that continues to soar as institutions snap up shares based on aggressive sales trends at the company. There will be two key factors for this stock going forward.

First, for RH to continue to climb, it will likely require a very bullish market environment. In this type of atmosphere, investors will be much more prone to pay up to own a fast grower like Restoration Hardware.
Second, trends in the housing market will likely need to accelerate. This is a major driver of the company's current operating momentum. This stock would appear to be too expensive at current levels if the housing market were to trail off.

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