Red may be fashionable, but no one likes to see it on an income statement. Restoration Hardware (NASDAQ:RSTO) had a little too much of it in its quarterly report.

Citing lower-than-expected revenues and a need for promotional pricing, management earlier this month said that quarterly results wouldn't meet original expectations. It was true to its word. Revenues came in at $183.8 million, a scant 2.5% higher than a year ago. The company also lost $0.20, reversing the narrow $0.01 it earned last year.

In light of this situation, the company plans some cost-cutting, including staff reductions at headquarters and a reduction in catalog production costs. It will also invest in a new computer system to better track inventory and make the company more productive. These steps are all well and good, but the company still needs to get the top line moving. To get things rolling, the company has introduced Restoration Hardware Trade, a direct-sales division; the Restoration Hardware Bed & Bath catalog; and a redesigned website. Only time will tell whether these steps are sufficient. The latest furniture promotion -- pick a color and type of material, and in 45 days you can get your customized couch delivered! -- is nice ... but it's not enough. This is not a new idea in retail, after all.

The company sells high-end merchandise, which is a tiny slice of the market, and, certainly, the housing slowdown hasn't helped the sector. However, Williams-Sonoma (NYSE:WSM) managed to beat expectations as earnings, excluding charges, fell by a penny. It namesake stores had a 1.1% rise in same-store sales, and its Pottery Barn division rose 1.8%.

Merchandise is the key, but getting the right mix in place won't be easy. Just look at Pier 1 Imports (NYSE:PIR), which undertook a major overhaul of its merchandise but has still struggled. Restoration Hardware has a lot of debt, too. It ended the quarter with $106.5 million on its balance sheet, while its debt-to-capital ratio now stands at 60% and its interest coverage ratio is around 2.3, making things a bit more stressful.

The company wants to inspire, but with a falling interest-coverage ratio, a difficult environment, and struggling sales, I'm not inspired -- so it's best to avoid these shares.

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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.