Restoration Hardware Is Firing on All Cylinders. Should You Buy?

Source: Restoration Hardware.

Restoration Hardware (NYSE: RH  ) was rising by more than 13% on Thursday afternoon after delivering truly impressive financial performance for the first quarter of fiscal 2014. Restoration Hardware is clearly firing on all cylinders while outperforming competitors in the business; this includes not only companies facing problems such as Bed Bath & Beyond (NASDAQ: BBBY  ) but highly successful growth players like Williams-Sonoma (NYSE: WSM  ) . Should you buy Restoration Hardware?

Firing on all cylinders
Restoration Hardware announced a big sales increase of 22% during the quarter ended on May 3. Revenues of $366.3 million were comfortably above Wall Street analysts' expectations of $346 million, and also higher than the company's own guidance of between $345 million and $350 million for the quarter.

Comparable brand revenues, which includes direct sales, increased by an outstanding 18% during the period. Direct revenues were 176.4 million during the quarter, a 24% increase versus the same period in 2013.

Gross profit grew 22% to $124 million, while gross profit margin expanded by 20 basis points, from 33.8% of sales to 34%. Adjusted operating income jumped to $14 million from $4.6 million, and adjusted operating margin expanded by 240 basis points.

Adjusted net income increased 217%, from $2.3 million to $7.2 million, and adjusted diluted earnings per share grew 200% to $0.18. This was materially better than the average earnings estimate of $0.10 per share for the quarter, and also above the company's guidance of $0.9 to $0.11 per share.

Restoration Hardware increased its guidance for the rest of the year. The company expects revenues in the range of $1.86 billion to $1.89 billion versus a previous guidance of $1.83 billion to $1.86 billion. Earnings per share guidance was also increased; Restoration Hardware forecasts adjusted earnings per share to be between $2.24 and $2.30 per share, versus a previous earnings guidance of $2.14 to $2.22 per share.

CEO Gary Friedman was remarkably optimistic regarding the company's growth prospects in the years ahead. Friedman described Restoration Hardware as a "$1.6 billion start-up," and he said the company has the potential to generate between $4 billion and $5 billion in annual sales once its real estate transformation in North America is complete.

This is clearly an ambitious target; however, the way things are going, Restoration Hardware looks like it has considerable potential for growth over the long term.

Restoration Hardware vs. Bed Bath & Beyond and Williams-Sonoma
Not every company in the business is doing that well -- far from it, in fact. Bed Bath & Beyond is performing materially worse than Restoration Hardware in spite of its leadership position in the industry based on its huge store base of 1,496 locations as of the end of the first quarter.

Bed Bath & Beyond announced disappointing financial performance for the quarter ended on March 1. Net sales fell 5.8% to $3.2 billion versus $3.4 billion in the same quarter of 2013, while comparable sales increased 1.7% year over year. Net income per diluted share came in at $1.60 per share, lower than the $1.68 per share the company earned in the same period of 2013.

Williams-Sonoma is doing considerably better than Bed Bath & Beyond, as the company's brands and designs are resonating strongly among consumers. Besides, like Restoration Hardware, Williams-Sonoma is focused on the high end of the pricing spectrum, which is a particularly solid niche in the retail industry lately. In addition to this, Williams-Sonoma has done a fantastic job adapting to the online retail revolution, and the company is reaping the benefits on the financial front.

Williams-Sonoma announced a sales increase of 9.7% during the quarter ended on May 4, reaching $974 million during the period. Comparable-brand revenues grew 10% versus the same quarter in the prior year, and earnings per share increased by a healthy 20% to $0.48.

Unlike Bed Bath & Beyond, Williams-Sonoma delivered both better-than-expected sales and earnings for the last quarter, and the company also raised its guidance for fiscal 2014. Still, Williams-Sonoma is not generating the same level of growth as Restoration Hardware.

Foolish takeaway
Being a relatively small player in a cyclical industry such as home furnishing, Restoration Hardware can be considered an investment with above-average risk levels. However, the company is performing brilliantly, both on a stand-alone basis and in comparison to competitors such as Bed Bath & Beyond and Williams-Sonoma. For investors looking for rapidly growing companies with plenty of room for expansion, Restoration Hardware looks like an interesting name to consider.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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