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Could Restoration Hardware See Even More Pain Ahead?

By Dan Caplinger – Mar 30, 2016 at 9:36AM

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The home-furnishings specialist confirmed its holiday results but had troubling guidance.

Image source: Restoration Hardware.

Investors in home-furnishings retailer Restoration Hardware (RH 3.87%) have seen their stock fall sharply over the past year, raising concerns about the company's future prospects. The retail sector generally has gotten a lot more competitive, and Williams-Sonoma (WSM 1.16%) and other players in the space have fought over the upper end of the home-furnishings niche, Restoration Hardware has had to work hard to put itself in the best position possible to grow.

Coming into Tuesday's release of final fiscal fourth-quarter results, Restoration Hardware investors were already prepared for weaker holiday-season figures than they had originally hoped to see, but guidance for the near future was also disappointing. Let's take a closer look at Restoration Hardware's final results and what investors need to prepare for in the months to come.

Restoration Hardware confirms its results
Restoration Hardware's fourth-quarter results matched up well with what the company had projected in February. Revenue remained at $647.2 million, up 11% from the year-ago quarter. Adjusted net income had a slightly larger decline than originally estimated, coming in at $41.2 million and working out to $0.98 per share, a penny less than the preliminary estimates had indicated.

Restoration Hardware gave more detail on what drove its headline results. Perhaps the biggest disconnect came from the fact that even though demand sales and written orders climbed 21%, revenue grew at barely half that pace. The company pointed to several difficulties explaining that trend. First, production delays among suppliers related to the new RH Modern line have hampered Restoration Hardware's ability to deliver on orders in a timely fashion, and it believes that those pressures could continue through the first half of 2016. Second, the retailer said that underperforming markets in areas that had grown sharply during the energy boom, including Texas, Miami, and Canada, hurt revenue by 4 percentage points in the second half of 2015 and have been a five-point drag on revenue so far in the first quarter of 2016. Finally, promotional activity to drive sales was less successful than the company had hoped, and Restoration Hardware pointed to pullbacks from high-end retail consumers as hampering incremental revenue gains.

Nevertheless, Restoration Hardware CEO Gary Friedman looked to the big-picture view. "Despite the headwinds," Friedman said, "our two key value-driving strategies -- the expansion of our product offer and the transformation of our real estate -- are working exceptionally well." The CEO continued pointing to the RH Modern concept and the next-generation Design Galleries as having strong potential for the future.

Can Restoration Hardware bounce back?
Even with that optimism, Restoration Hardware faces some tough challenges, and its outlook for the immediate future didn't instill confidence that any turnaround will be as large or as fast as investors had hoped.

For the fiscal first quarter, Restoration Hardware expects revenue of between $452 million and $456 million, which was short of the $460 million consensus forecast among investors. Adjusted earnings of $0.04 to $0.06 per share would be more than a dime below current expectations, and it would represent a drop of more than three-quarters from year-ago levels.

For the full 2016 fiscal year, Restoration Hardware's outlook was similarly downbeat. Revenue growth will likely be limited to low- to mid-single-digit percentage figures, which is slower than the 11% sales increase that investors were hoping to see. Adjusted earnings will likely be flat to down slightly for the year, in contrast to projections from investors for 9% growth. Admittedly, rival Williams-Sonoma has seen similar challenges, and investors expect only single-digit percentage growth in that company's top and bottom lines for 2016. Nevertheless, Williams-Sonoma is somewhat further along in its growth trajectory than Restoration Hardware, and Williams-Sonoma has past experience with challenging conditions to help guide it through the current tough times.

Restoration Hardware shares initially responded by falling in after-hours trading following the announcement, but most of those losses disappeared by Wednesday morning. Given the beating that the stock has already taken, Restoration Hardware investors seem largely resigned to the prospect of a long process of recovery in an increasingly competitive retail environment.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Restoration Hardware and Williams-Sonoma. 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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