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Restoration Hardware Keeps Building, but Is a Slowdown Coming?

By Dan Caplinger - Sep 10, 2015 at 5:06PM

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The home-furnishings specialist did well during the latest quarter, but predicted slower future growth than hoped for the current period.


Image: Restoration Hardware.

The return of favorable conditions to the housing market has restored many once-beaten-down companies to prominence, and home-furnishings retailer Restoration Hardware (RH -4.54%) is one of the best-known businesses to find itself back on a growth trajectory during the most recent housing boom. Coming into Thursday afternoon's fiscal second-quarter report, Restoration Hardware investors were largely optimistic about the company's growth prospects, although a choppy stock market, and concerns about possible interest rate increases in the near future, had some investors worried about the potential impact on housing.

For its part, Restoration Hardware reported solid results for the quarter, but its guidance looking forward was somewhat weaker than investors were expecting to see. Let's look more closely at Restoration Hardware, and what might lie ahead for the retailer.

Restoration Hardware keeps on delivering on the American Dream
Restoration Hardware's fiscal second-quarter results continued the positive momentum that the retailer has had in recent quarters, with the company hitting new records in several key metrics. Revenue climbed 17%, to $506.9 million, eclipsing even the ambitious 16% growth rate that investors had expected to see. On the earnings front, adjusted net income climbed 30%, to $36 million, and that worked out to adjusted earnings of $0.85 per share, $0.01 better than the consensus forecast among investors.

As we've seen in past quarters, Restoration Hardware kept up its strength in a number of areas. Growth in comparable-brand sales accelerated to 16%, topping both last year's fiscal second quarter and the pace of growth in the first quarter. Where that growth came from was somewhat surprising, though, as Restoration Hardware reported 21% growth in store revenue compared to just 13% higher revenue coming from its direct channels. The retailer also continued to work on building its profit margins, with adjusted operating margin climbing by nearly a full percentage point from year-ago levels.

Restoration Hardware executives were happy about the company's progress. As CEO Gary Friedman said, the results "further demonstrat[ed] the disruptive nature of the RH brand and the power of our multi-channel business model." Friedman also pointed to the fact that Restoration Hardware's latest results came on the heels of big gains last year; even though it was faced with tough comparisons, the retailer managed to deliver the performance investors wanted to see.

What's to come for Restoration Hardware?
Friedman believes that the best is yet to come. "We will be launching two significant new businesses," Friedman said, referring to the new RH Modern and RH Teen concepts. In combination with new next-generation Design Gallery openings in four key cities and various other expansion efforts, Friedman believes that Restoration Hardware is "on a clear path to accelerate our growth in the fourth quarter and into fiscal 2016."

Yet Restoration Hardware's guidance for the near future didn't quite live up to the high hopes that investors had for the retailer. For the fiscal third quarter, Restoration Hardware provided guidance of revenue between $531 million and $541 million, and adjusted earnings of between $0.60 to $0.65 per share. Both figures were less than the consensus forecast that investors following the stock had for the company.

For the full year, though, the new range of $2.158 billion to $2.178 billion in sales was a slight upgrade from previous guidance. Also, adjusted earnings of $3.06 to $3.16 per share would be at the upper end of its forecast from last quarter despite being in line with investor expectations.

Overall, Restoration Hardware investors seemed dissatisfied with the disconnect between an upbeat quarterly report and at least a short-term pause in the pace of the retailer's sales growth during the fiscal third quarter. The stock fell as much as 2% in the first 30 minutes of after-hours trading following the announcement before cutting its losses later in the session.

Short-term impacts aside, the much bigger question for Restoration Hardware is whether the health of the housing market can last into the holiday season and beyond. Even with rising worries about the housing market, Restoration Hardware appears to have macroeconomics on its side -- at least for now -- and that's good news for its prospects during the rest of 2015.

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