How Housing Restored Restoration Hardware

On Thursday, Restoration Hardware (RH 1.27%) will release its latest quarterly results. With the formerly private company having come public once more just last year, Restoration Hardware picked the perfect moment to reemerge, capitalizing on the rebound in housing in drawing interest from investors.

Still, it's important to understand that for years before going private, Restoration Hardware struggled under the weight of excess inventory during the housing bust. As the company has refocused its efforts to capture the highest end of its market, the question remains whether it could fall prey to another downturn in housing and the overall economy during the next downward cycle. Let's take an early look at what's been happening with Restoration Hardware over the past quarter and what we're likely to see in its quarterly report.

Stats on Restoration Hardware

Source: Yahoo! Finance, S&P Capital IQ. * In past two quarters as public company.

Can Restoration Hardware cash in on housing's boom?
Analysts have gotten a lot more enthusiastic about Restoration Hardware's earnings prospects in recent months, reversing initial calls for a quarterly loss and boosting current fiscal-year estimates by nearly a dime per share. The stock has also pressed higher, soaring more than 40% since early March.

Much of the enthusiasm about Restoration Hardware came in April, when the company delivered extremely strong results in its holiday quarter. With a 30% jump in revenue coming largely from existing stores, Restoration Hardware saw an impressive 26% same-store sales increase during the quarter. The company also took the opportunity to raise its guidance for the April quarter and full year, further bolstering the bullish view of the company. Even better, the company came back for seconds in May, again pushing its guidance up and predicting a ridiculously strong 41% jump in same-store sales.

So far, Restoration Hardware has been able to focus on building up a large-enough network of stores to go up against its much larger competitors. Williams-Sonoma (WSM 2.47%) has also done a good job of keeping gross margins high by tailoring its offerings to high-end customers, but it has a large enough store presence in the U.S. that Williams-Sonoma has been looking abroad for growth opportunities.

Yet the threat to Restoration Hardware is one that's being felt throughout housing-related industries: a potential end to Federal Reserve measures to stimulate the economy. With mortgage rates already having risen sharply, home-improvement retailers Home Depot (HD 1.28%) and Lowe's (LOW 1.92%) have fallen back from their recent highs, and both of them could see weaker activity both from consumers and from construction-industry purchasers if rates keep rising. Restoration Hardware could potentially suffer from the same trends going forward.

In Restoration Hardware's report, watch for commentary on how sensitive the company is to the changing interest rate environment. If management suggests any drop-off in sales, then the big boost the stock has seen could give way to a pullback.

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