Why Restoration Hardware Holdings Inc. Surged Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of home furnishings retailer Restoration Hardware Holdings  (NYSE: RH  ) soared 15% today after its quarterly results and outlook topped Wall Street expectations.

So what: Restoration Hardware's stock has been volatile over the past year on uneven growth, but today's first-quarter results -- adjusted earnings per share of $0.18 topped Wall Street by $0.07 on a revenue spike of 22% -- coupled with upbeat guidance are forcing analysts to quickly increase their expectations. Management said it expects to generate annual sales of $4 billion-$5 billion, mid-teen operating margins, and significant free cash flow once its real estate transformation is complete in North America, providing some bullish visibility into the company's long-term prospects as well. 

Now what: Management now sees full-year EPS of $2.24-$2.30 on revenue of $1.86 billion-$1.89 billion, versus its prior view of $2.14-$2.22 and $1.83 billion-$1.86 billion. "The business momentum and strong trends we are seeing thus far in 2014 give us further confidence in our financial outlook for the year," said Chairman and CEO Gary Friedman in a press release. "Looking forward, we remain focused on our key value-driving strategies including the expansion of our product offer and the transformation of our retail stores." With Restoration Hardware shares busting to a new 52-week high today and trading at a steepish forward P/E of 30, however, I'd hold out for a wider margin of safety before betting too heavily on those prospects. 

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