The Rise and Fall of Restoration Hardware

Over the past week, Restoration Hardware's (NYSE: RH  ) stock has fallen 11%. Over the past year, however, the stock is up 80%. Just looking at the stock, it's clear that something went very right, but that recently things have gone wrong. In some part, Restoration has been caught up in this year's retail fall. Bad news from many brands has spread bad news across the sector, and many businesses have suffered. If Restoration Hardware is simply caught in the dragnet, it could present an excellent buying opportunity. What's really going on?

Restoration Hardware's rise
The brand had its IPO late in 2012, hitting the market at $24 and quickly rising to the mid-$30s. Then suddenly last June things took off. That coincided with a fantastic first-quarter earnings release, posting a 41% increase in comparable sales over the previous year. That also bumped up net income into the black against a $1.3 million loss in 2012's first quarter.

From there, the brand just kept on moving from strength to strength. In the second quarter, comparable sales grew at 26% and revenue grew at a solid 30%. The market pushed the stock up to $76 by November, and then things went pear-shaped.

Restoration Hardware's fall
In December, even a 29% increase in comparable sales couldn't shield the brand from a backlash. In addition to missing the Street's estimates, Restoration announced the unexpected resignation of co-CEO Carlos Alberini. Alberini was moving to Lucky Brand, which Fifth & Pacific had just sold off. The stock fell more than 10%, and has been unable to recover.

Now, back to that sector issue that's been plaguing retailers. For Restoration Hardware, the offenders are Pier 1 and Bed Bath & Beyond. Pier 1 offered an unimpressive holiday sales update last week, dragging the stock down. Meanwhile, Bed Bath & Beyond announced an anemic comparable sales increase in its third quarter. Those two results pushed everyone in the homewares business down, including Restoration Hardware.

Final thoughts
In 2014, Restoration Hardware has a lot to prove, but it has a lot of resources to make that happen. The company is suffering, in part, from the loss of its co-CEO. Luckily, a good quarter can show the investment world that Alberini, while useful, was not required for the company's success. If it can do that, then it can regain a lot of its lost ground.

On the other hand, Alberini may have been the man with the vision. Before Restoration Hardware, he had worked for Guess?, developing his retail acumen and working to fix the denim retailer's brand problems. It may be that, without Alberini, Restoration Hardware no longer has the vision it needs to keep up its rapid pace. Only time will tell.

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