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Why Restoration Hardware Holdings Stock Plunged Today

By Steve Symington - Sep 5, 2018 at 2:10PM

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The home decor leader handily beat earnings estimates but fell short on the top line. Here's what investors need to know.

What happened

Shares of Restoration Hardware Holdings Inc. (RH 1.34%) were down 11% as of 1:45 p.m. EDT Wednesday after the home furnishings and decor retailer announced mixed quarterly results relative to expectations.

More specifically, RH's revenue climbed 4.1% year over year to $640.8 million, translating to adjusted net income of $67.4 million, or $2.49 per diluted share, up from $0.65 per share in the same year-ago period. By comparison, RH's guidance called for significantly lower earnings per share in the range of $1.70 to $1.77. But analysts, on average, were also modeling higher revenue of $660 million.

A beautifully decorated room with Restoration Hardware products

IMAGE SOURCE: RESTORATION HARDWARE.

So what

"As articulated since the beginning of the year, we continue to manage the business with a bias for earnings versus revenue growth," explained RH chairman and CEO Gary Friedman. "We will restrain ourselves from chasing low quality sales at the expense of profitability, and instead focus on optimizing our new business model while building an operating platform that will enable us to compete and win over the long-term."

Friedman added that the company's decision to prioritize the bottom line has made it clear that the "earnings power of our new model is proving to be greater than previously anticipated and will be further amplified when we pivot back to growth in fiscal 2019."

Now what

As such, Restoration Hardware raised its fiscal 2018 earnings guidance to call for adjusted net income per share of $7.35 to $7.75, marking a 15% increase from both ends of its previous range. At the same time, however, the company also reduced its top-line guidance slightly to call for full-year adjusted revenue of $2.4898 billion to $2.521 billion.

In the end, it seems RH is exactly where it wants to be given its stellar earnings growth and planned shift back to focusing on revenue growth in the coming year. But until it can show more concrete signs of both top- and bottom-line growth, and with the stock already having tripled over the past year leading into this report, it seems the market isn't willing to give it the benefit of the doubt just yet.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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