Some things in life are reliable. The sun will set this evening, most likely while I'm home enjoying a nice dinner (provided my schedule doesn't change), and it will rise tomorrow morning.
I'm also beginning to think that Restoration Hardware (NASDAQ:RSTO) will regularly report a loss. Whatever improvement the company makes at the gross margin level always seems to be consumed by increased selling, general, and administrative (SG&A) expenses. Yes, I'm aware that the company is positioning itself for long-term profitability, but this effort has been going on for years without bearing fruit. Much like sports fans, Restoration Hardware shareholders always seem to be waiting for next year.
As you may have guessed, that's the story this quarter as well. Sales were up a solid 20%, same-store sales were up, and gross margins improved by 3%. Unfortunately, SG&A expenses as a percentage of sales were also up 3%, so at the operating profits line, the company is back at square one. The majority of the SG&A increase was due to increased catalog circulation costs.
Those are the GAAP numbers; there's a $1.5 million non-cash charge baked into them, and if you back that out, the company's operating margins did improve. In addition, the company's margin mix is a bit different from those of your average retailer, since it's focusing more on direct sales than retail stores. While the costs of leasing a store show up above the gross margin line, advertising expenses show up in SG&A. That said, the company still finds itself short of operating profitability.
Restoration Hardware sells wares similar to those of Crate & Barrel and Pottery Barn (which is owned by Williams Sonoma (NYSE:WSM)) but still seems capable of drawing a fair amount of sales. The company deserves some credit for heading in the right direction, given the struggles at Pier 1 (NYSE:PIR). Still, the economy has been kind the past few years, with consumer spending at robust levels. Even in these favorable conditions, Restoration Hardware has yet to reward investors with a regular profit -- and there's no telling when or if it might start doing so.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
