Can Restoration Hardware Earnings Top Williams-Sonoma and Pier 1 Imports?

Restoration Hardware (RH 0.64%) will release its quarterly report on Thursday, and investors have sent the stock soaring ever since spring. But with the arrival of the holiday season, can Restoration Hardware hold off competition from Pier 1 Imports (PIRRQ) and Williams-Sonoma (WSM -0.54%) and continue its excellent performance?

Restoration Hardware came close to failure during the aftermath of the housing bust before a private-equity firm saved the ailing retailer. Now having been public for more than a year, Restoration Hardware has emerged with a new attitude, using the resiliency of upscale luxury shoppers to tap into a market that it hopes will be more reliable. Yet Pier 1 and Williams-Sonoma have their own approaches to the industry, and they've also seen some success as home prices rise and shoppers become more confident about their financial futures. 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 report.

Stats on Restoration Hardware

Source: Yahoo! Finance.

Will Restoration Hardware earnings keep soaring?
Analysts have gotten even more optimistic about Restoration Hardware earnings in recent months, boosting their October-quarter estimates by a third and raising their projections for the current and next fiscal years by 7% to 9%. The stock has pulled back somewhat after a red-hot mid-year performance, with shares down 10% since early September.

Restoration Hardware's drop came early in the quarter, as the company simply wasn't able to live up to the high expectations that its soaring share price had made. Revenue jumped 30% on same-store sales growth of 26%, continuing its run of impressive comps that show the organic strength that Restoration Hardware's existing stores have. Adjusted earnings rose 62%, although a one-time charge sent GAAP earnings to a net loss. Future guidance looked equally impressive, with Restoration Hardware increasing its projections for fiscal 2014 earnings by about $0.24 per share. Yet shareholders bid the stock down by more than 10%.

Yet fundamentally, Restoration Hardware is still poised to benefit from positive trends in the housing industry. With home prices on the rise, homeowners are once more starting to build equity in their homes, and relatively low interest rates could allow them to tap that equity to start making long-deferred purchases of home furnishings. That's a trend that Williams-Sonoma's Pottery Barn and Pier 1 have also benefited from, with Williams-Sonoma's West Elm concept seeing a sales surge that's roughly comparable to Restoration Hardware's.

Moreover, Restoration Hardware hopes to build on its past success and become more efficient in its expansion. The company has plans to open 10 locations annually beginning in 2015, with the hope that it can make its stores larger yet less expensive to build and operate, boosting returns on invested capital in the process.

The big question is how competitors will respond to Restoration Hardware's gains. Williams-Sonoma has tried to boost its catalog and online sales, which already make up about half of its overall revenue, in order to improve margins. For Pier 1, appealing to customers at all income levels is a key part of its overall strategy, with unusual items that shoppers won't find at most locations. Those strategies could keep Restoration Hardware on its toes, especially during the key holiday season.

In the Restoration Hardware earnings report, watch to see how the company describes the early part of the holiday-shopping season. With many retailers reporting substantial discounting in order to move merchandise, anything that suggests that Restoration Hardware's brand isn't drawing shoppers could send the stock down again.

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