Bull of the Day: Restoration Hardware (RH) - Bull of the Day
13 September 2013 - 6:29PM
Zacks
Ready for a high-growth home goods retailer that just went on sale?
Then it's time to check out the high-end story at
Restoration
Hardware (RH).
The $2.6 billion luxury home furnishings retailer
offers a private-label assortment that is rich in fashion but
reasonably priced for its target clientele. It is a true
multi-channel retailer that sells its furniture, lighting, decor,
bathware, and outdoor and garden products through 71 retail
locations that it calls “design galleries” and 13 outlet stores,
which together account for 55% of sales.
Rounding out the customer engagement is a strong
e-commerce platform that accounts for the remaining 45% of sales,
which include child and baby products.
A Beat and Surprising Drop
RH reported earnings this week and continued its
strong performance with impressive second-quarter fiscal 2013
results. The company's adjusted quarterly earnings of 49 cents a
share handily surpassed the Zacks Consensus Estimate of 42 cents
and jumped 48% year over year.
But the stock got slammed down 12% after the report
because including one-time items the company actually reported a
loss. There may have also been some investor uncertainty about
another company decision: eliminating the splashy and expensive
fall catalog. It seems this struck many as having a potential
negative effect on revenues.
Why the Dip is a Buy
When you look at the important details of this
quarter's report, the company's guidance, and the analyst reaction,
you might conclude that RH is a good buy now -- if you don't mind
paying 35X for a 30% grower with an innovative management team
focused on extraordinary customer experiences.
Increased product demand led to a 30% jump in total
sales to $382.1 million that surpassed the Zacks Consensus Estimate
of $375 million. Comparable-store-sales surged 26%, while Direct
revenues increased 33% during the quarter.
Gross profit rose 22% to $139.2 million, while
gross margin contracted 260 basis points to 36.4%. Adjusted EBITDA
soared 42% to $40.8 million, whereas adjusted operating income
jumped 56% to $34.2 million.
Encouraged by the strong quarterly results,
Restoration Hardware raised its fiscal-2013 guidance for the second
time. The company now expects top-line improvement in the range of
31% to 32% to $1.56-$1.58 billion, up from its earlier guidance
range of a 23% to 27% increase. Moreover, earnings are forecast in
the range of $1.65 to $1.70 per share, significantly rising from
its previous guidance range of $1.41 to $1.47.
For the third quarter, total sales are expected in
the range of $385 million to $395 million, while earnings are
projected to range from 27 cents to 29 cents per share. Moreover,
for the fourth quarter, the top line is expected to be in the range
of $490 million to $500 million, while earnings are expected in the
range of 81 cents to 84 cents.
Following this upbeat raise in forward guidance,
several analysts scrambled to raise their earnings estimates taking
the consensus for this year to $1.68 from $1.48 and next year to
$1.93 from $1.86.
Growth Outlook Restored
Looking ahead for this exciting brand that has
captured the hearts and wallets of a growing upper-income
clientele, several initiatives like product expansion and
innovation, enhancement of customers’ shopping experience, and its
no-brainer plans to secure a foothold in the Kitchen and
Antiquities segment are expected to accelerate sales growth in the
long run.
Here is what one analyst said about the company's
strategy with discontinuing the expensive catalog...
The decision to eliminate the sourcebook (catalog)
was fully vetted. Management indicated that it tested this decision
for two years and found that there was minimal sales erosion from
not re-mailing a book to customers. We believe a reallocation of
spend to direct marketing should close the gap if not eliminate it
completely. Our concerns about the fall book elimination were
further eased by the $80mn increase in full-year sales guidance
midpoint to midpoint, after a 2Q outperformance of only $4.6mn.
While the housing market takes a breather in its
strong, multi-year recovery, rest assured that consumers are still
opening their wallets to spend on products that improve, beautify,
and otherwise restore their pride in their homes. In this light,
Restoration Hardware is a long-term growth story to take advantage
of on the dips.
Kevin Cook is a Senior Stock Strategist for
Zacks where he runs the Follow The Money portfolio.
RESTORATION HDW (RH): Free Stock Analysis Report
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