Home Depot, Restoration Hardware, or Lumber Liquidators: Who Has the Best Outlook in the Home-Improvement Space?

Recently, we have been given fundamental updates from both Home Depot (NYSE: HD  ) and Lumber Liquidators (NYSE: LL  ) , and earnings from Restoration Hardware (NYSE: RH  ) . While all three further validated the continued strength of the home-improvement space, Restoration Hardware had, without question, the most impressive showing. Who had the best outlook now?

A megacap that keeps exceeding expectations: Home Depot
Home Depot has seen an impressive five-year 235% appreciation in its company's valuation, driven by fundamental growth. During this period, it always appeared as though growth would reach a peak, but based on the company's outlook, this so-called peak is nowhere near.

Home Depot recently issued a business update, and is now guiding for 2014 sales growth of 5% year over year. In addition, it expects the operating margin to expand 70 basis points and eventually rise to 17% by 2015; the operating margin is currently 11.5%.

Therefore, Home Depot expects earnings-per-share growth of 17% next year, which is quite an accomplishment for a large and established retailer.

Not quite what analysts expected, but still impressive: Lumber Liquidators
Lumber Liquidators updated its outlook by boosting its EPS guidance to between $2.72 and $2.75. However, this guidance was still slightly lower than the $2.76 that analysts expect.

In addition, the company provided its early read on 2014, saying it expects revenue of $1.1 billion to $1.2 billion -- this equates to year-over-year growth of 16% to 18% -- and anticipates comparable-store sales to rise in the high-single to low-double-digit range.

While all of the above might be below or equal to the estimates of analysts, the guidance reaffirms the level of growth involved in home improvement and housing.

Simply incredible, although the market doesn't seem to notice: Restoration Hardware
Restoration Hardware reported earnings on Thursday after the market closed, and is currently trading lower by double digits. The report itself was absolutely incredible on every facet, as not one metric reflected fundamental weakness.

In particular, the company reported revenue of $395.8 million, $5 million better than estimates, and an EPS of $0.32, $0.04 better than expected. This performance was possible due to revenue growth of 39% year over year and operating income that soared 299% in the same period.

When compared to the company's previous quarter, revenue and income growth accelerated while cost growth decelerated.

Therefore, the stock's decline was not in any way related to fundamental performance but rather news that co-CEO Alberini Plans will step down at the end of January. Alberini has been crucial in the turnaround and rebranding of Restoration Hardware. However, investors should keep in mind that he was only a co-CEO, and the other half of the company's top leadership will remain intact.

Which is best?
In reality, to compare these three companies and to then determine the best investment opportunity is not fair. Home Depot is on another level, where expansion is no longer relevant and the stock is driven more-so by mid-single-digit growth and margin expansion. However, at this point, given Home Depot's consistent growth, it'd definitely be hard to bet against the stock.

On the other hand, Lumber Liquidators and Restoration Hardware are comparable, as both are of similar size. Yet, when we look at fundamental growth, valuation, and the outlook of these two companies, Restoration Hardware appears to have the most to offer investors.

Restoration Hardware is expected to produce $1.9 billion in sales in 2014, far more than Lumber Liquidators' $1.2 billion and with expected growth of 22%, also superior. Clearly, based on Restoration's last quarter, the company is also greatly improving its margins, but this isn't what makes Restoration so attractive to investors.

What makes Restoration so attractive?
Honestly, we could look at 100 different things as it relates to Restoration versus Lumber Liquidators. We could point to the fact that Restoration has significantly faster growth yet Restoration trades at just 1.3 times its 2014 expected sales; Lumber Liquidators trades at 2.1 times its 2014 guided sales. In fact, if we use 2014 estimates as a guide, Restoration trades at the same multiple as Home Depot, yet Restoration is growing about five times faster. Thus Restoration deserves a higher premium.

With that said, Restoration is priced insanely cheap, and there are countless reasons to believe that rapid growth is sustainable. The main reason is because the company consistently generates growth of more than 30% but without adding any new stores. In other words, all of Restoration's growth comes from existing stores. Moreover, with the company exploring new markets and planning to expand rapidly, Restoration's growth could actually accelerate in the years ahead.

Thus, both Home Depot and Lumber Liquidators gave great updates, but regardless of Restoration's stock performance, it had the best showing and is surprisingly the cheapest stock. As an investor, don't expect its post-earnings double-digit losses to last long.

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