Restoration Hardware (NASDAQ:RSTO) might just be the most appropriately named company out there. No matter what the year or the season, there is always something at this company that needs to be fixed.
Having looked at Restoration Hardware a few times in the past, I decided I would look at the financials and then read the press release and corresponding conference call. I knew from experience that any statements from the company would be more positive than negative, no matter how good or bad the results were.
My spilling digital ink on the financials isn't necessary, though. Our Fool by Numbers piece did a good job of that already, and the results are pretty self-explanatory: It was a dreadful quarter for Restoration Hardware. The only numbers that showed positive year-over-year growth were sales, share count, long-term debt, and inventory. The sales growth might have been a small positive to take away from the quarter, but since the inventory growth was a full 4% higher, it's not.
What is far more interesting about Restoration's results are the reasons -- or excuses, take your pick -- given for the company's poor showing. I also find surprising its strategy going forward, as well as the performance of the stock on Friday. Let's go through these items one at a time.
First, the company blamed its poor results on a tough macroeconomic environment and poor weather on the East Coast the day its outdoor catalog was delivered. I don't disagree that the macro-environment is tough for Restoration Hardware, but I will point out that Williams-Sonoma (NYSE:WSM), owner of Pottery Barn, West Elm, and Williams-Sonoma Home, turned a profit this quarter.
Bad weather hits on the day that one of its big catalogs was being delivered, and the weather pulled down the sales from that catalog? That line of reasoning is just bizarre. I would think that bad weather would benefit a company that is doing more catalog and online sales, because people are staying home and not going to the malls. Even assuming the company's logic is valid, I still think management bungled here: As someone who grew up in New England, I can tell you that the weather is more often than not lousy in April and should be -- and typically is -- planned on.
The company's strategy going forward is where things get even stranger. Instead of hunkering down to survive the current storm, Restoration Hardware is expanding into multiple new categories. All of the company's expansion plans are extensions of its current home-furnishing offerings, but all of the plans push into new markets, such as sales to developers and new brands. This isn't only an odd timing move, but I also think that going after developers for sales is likely a mistake, because while sales volumes will be higher, margins will likely be lower.
According to our data provider, Capital IQ, Restoration Hardware's return on capital peaked at 5.7% last year. In previous years, it was 2% or less. Restoration's debt costs it more than returns being earned, and that means there are no returns being earned for equity holders here. The risk present in an investment in this company is mind-boggling, given the debt the company is employing and the risk of expanding into new channels when the original business was never that great to begin with.
In truth, I've come to expect odd things from Restoration Hardware over the past couple of years, but all of this news didn't move the stock much on Friday. The shares are even up today. I can only assume that investors are encouraged that the company expects the rest of the year to be better.
It's worth noting, though, that competitor and historically stronger performer Williams-Sonoma doesn't share this optimism. Williams-Sonoma reported last week that it has lowered its guidance for the rest of the year, and not only is its growth strategy far more conservative, but it also has a much stronger balance sheet.
Investors betting on improvements at Restoration Hardware shouldn't overlook the diverging strategies and financials of the companies in its sector.
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Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
