Restoration Hardware (NYSE:RH) has avoided much of the difficulty its fellow mall-based retailers have experienced, largely because the store is in the home-improvement market. Despite extremely challenging weather conditions, Restoration Hardware's higher-market demographic kept sales growing on all levels -- from systemwide revenues to store-level comps. Without growing its namesake retail footprint at all, the company is posting some seriously impressive figures. As management guides for continued strength in the coming periods, the market has continued to rally the stock, but is it a buy today at a relatively rich valuation?
All systems go
Home-improvement stocks have had a great run in recent years, though lately the mainstream (and largest) players have lagged due to wretched weather conditions. In light of this, it's particularly compelling that Restoration Hardware posted 26% net sales growth from the year-ago quarter and an even greater 38% adjusted net income bump to $0.83 per share. Leading the charge was pure, organic sales growth. Same-store sales grew 17%! What's even more encouraging is that on a two-year basis, same-store sales have leapt up 44%.
How is Restoration Hardware outpacing all of its peers in the home-improvement space? Niche merchandising. If you've ever been inside one of the stores, they are instantly recognizable as kind of like Pottery Barn but nicer. But seriously, these stores sell home fixtures and even full-room sets to customers with deep pockets. For the most part, this is not the Home Depot crowd. Restoration Hardware's customers aren't feeling the economic tepidity that much of the nation is.
The company is also in the midst of transforming its real estate portfolio. While Restoration Hardware is not expanding its mall-based footprint, the company is tacking on larger-format design centers as well as outlets. In the past few years, retailers have generally found greater success in their outlet locations -- larger-format stores selling merchandise at lower prices. Outside of this, though, it's interesting to see the company go after more square footage when most retailers are trying to slim down their brick-and-mortar exposure.
With the extremely encouraging same-store sales figures, it's easy to understand why.
A buy today?
There is one major snag to the Restoration Hardware story: its valuation. At nearly 28 times forward earnings and with a trailing EV/EBITDA of nearly 35 times, this is one expensive retailer. The stock has advanced more than 100% over the past year, and while that isn't in isolation an indicator of overvaluation, the other metrics confirm it. For comparison, the much slower-growing but long-term-oriented Home Depot trades at less than 16 times earnings and pays a 2.4% dividend.
The strategy is sound and the business will continue to grow at attractive rates, but even the most growth-hungry investors should keep in mind downside risk here. Restoration Hardware is a business priced to grow with no protection otherwise.
This is a great business, but it's not a comfortable buy at its current levels.