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Restoration Hardware Takes a Huge Holiday Hit

By Dan Caplinger - Feb 25, 2016 at 4:24PM

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The home-furnishings specialist's preliminary results sent the stock plunging.

Image: Restoration Hardware.

Until late last year, home-furnishings retailer Restoration Hardware (RH 1.57%) had performed exceptionally well, taking full advantage of the new boom in the housing market. Yet coming into Thursday's release of preliminary fourth-quarter results, Restoration Hardware stock had lost half its value because of concerns about slowing growth from the top-end of the retail spectrum.

Just as upscale department store Nordstrom (JWN 2.26%) reported less-than-ideal results that briefly sent its stock sliding, Restoration Hardware's preliminary results and guidance sent its share price down sharply. Let's look more closely at what Restoration Hardware said about its holiday quarter, and why investors are so upset about the results.

Restoration Hardware's walls come crashing down
Restoration Hardware's preliminary fourth-quarter results were extremely disappointing in investors' eyes. Revenue picked up 11%, to $647.2 million, which represented a growth rate that was only about half as fast as investors were expecting. Adjusted net income actually fell almost 2% from year-ago levels, and that resulted in adjusted earnings of $0.99 per share, $0.36 per share less than the consensus forecast among those following the stock.

Preliminary results don't have the detail that Restoration Hardware will reveal in its full report, but a few numbers gave some color to the release. Comparable-brand sales rose 9%, slightly faster than the 7% in the third quarter, but still well below the 24% growth in the fourth quarter of 2014. Adjusted operating margins fell more than a full percentage point, pointing to further evidence of failing to turn sales gains into profits.

Restoration Hardware CEO Gary Friedman tried to explain the results by listing three key factors. First, the company said that its suppliers have been having trouble ramping up production of products under the RH Modern line. That prevented Restoration Hardware from turning a 21% rise in demand sales and written orders into actual top-line growth.

Second, Restoration Hardware said that it has seen a dramatic drop in the geographical areas that have the largest exposure to oil and other energy markets, as well as those that are vulnerable to currency fluctuations. Friedman highlighted Texas, Miami, and Canada as three areas that together weighed on total company revenues to the tune of four percentage points in the fourth quarter. In aggregate, the weaker markets are trending 20 points lower than the rest of Restoration Hardware, and the CEO suggested that it will take year-over-year results that reflect the weakness of those markets in the year-ago period before things look a lot better.

Finally, Restoration Hardware said its promotional activity for the holiday season didn't result in the same levels of success as in the past. Friedman blamed a negative wealth effect from weak stock markets in January, which he argued might have led customers to shy away from making purchases.

What's ahead for Restoration Hardware?
Restoration Hardware certainly isn't giving up. For 2016, Friedman pointed to four key focus areas. The retailer intends to optimize its core business, with an emphasis on RH Modern and the core RH Interiors business.

Restoration Hardware will be opportunistic with real estate as prices come down. It will elevate the customer experience with better quality and in-home delivery. Last, it will elevate the Restoration Hardware brand, while changing its promotional activity to promote a new membership model.

Restoration Hardware also said that its underlying fundamentals remain strong. Opportunities to improve margins could help profit growth, and early success with its Design Galleries should help promote expansion into the future.

Investors can hope that Restoration Hardware has the same experience that Nordstrom did. In the wake of its sluggish comps and tepid guidance for 2016, Nordstrom shares dropped as much as 11% the day after the after-market release earlier in February. Since then, though the stock has regained all of its lost ground as investors got back their confidence in Nordstrom's reputation and business-model strength. Restoration Hardware doesn't necessarily have the same strong reputation as Nordstrom, though, and the problems that Restoration Hardware is describing seem more severe than what Nordstrom said in its report.

Restoration Hardware stock closed the day down more than 25%, and many shareholders seemed to take the results as evidence of an imminent economic slowdown. Others believe this could be a bargain opportunity; but in order to capitalize, Restoration Hardware will have to make good on its appeals to its customers to strengthen their demand.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Nordstrom and Restoration Hardware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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