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Restoration Hardware Holdings Inc. reported its first quarterly decline in a key sales figure since going public and sharply lower profit as it continues to grapple with production issues.

Still, the luxury home goods retailer's second-quarter results landed above expectations, sending its stock up 13% to $40 in after-hours trading on Thursday.

Restoration Hardware has been dealing with production woes along with a sales slowdown as it switched from a promotional to a membership model.

While those challenges have weighed on results, Chief Executive Gary Friedman— hired from rival Williams-Sonoma Inc. as part of an earlier turnaround effort—said that retail shops are the key to unlocking the company's value. Design ateliers will be added to showrooms along with restaurants and coffee shops at select locations, including its flagship store in Manhattan's Meatpacking District that is under construction and San Francisco's Bethlehem Steel Building, much as it did in Chicago's 3 Arts Club building.

Mr. Friedman acknowledged in June that the company's "missteps and investments to transform our brand and business" have hurt short-term results, but they would eventually "be recalled as brave bumps along the road less traveled." The production issues drove the company to a first-quarter loss, its first quarter in the red in nearly three years.

On Thursday, the company said its second quarter bounced back to the black, as it posted a profit of $6.9 million, or 17 cents a share. Still, net income was down 77% from a year earlier. Excluding stock-based compensation and other items, profit fell to 44 cents a share from 85 cents a share a year earlier.

Meanwhile, revenue rose 7% to $543.4 million, helped by the acquisition of luxury kitchen and bath fixtures company Waterworks. However, comparable brand sales, a key sales figure for the retailer, declined 3%. Restoration Hardware had projected adjusted profit of 28 cents to 33 cents a share on $505 million to $520 million in sales.

Restoration Hardware defines comparable brand sales as sales at stores open for at least 14 months, excluding outlet stores.

Gross margin narrowed to 33.1% from 38.3% a year earlier.

The retailer, which affirmed its financial projections for the year, expects to make 13 cents to 18 cents a share in adjusted profit this quarter on $520 million to $530 million in sales. Analysts surveyed by Thomson Reuters expect 40 cents a share on $539.7 million in sales.

Based in Corte Madera, Calif., Restoration Hardware started as a store of "nostalgic discovery items" with a $20 million market capitalization and an 84-page catalog. The retailer's market value and product array have multiplied as its sales topped $2 billion a year. It now targets $4 billion to $5 billion in sales annually.

Write to Maria Armental at maria.armental@wsj.com

(END) Dow Jones Newswires

September 08, 2016 18:35 ET (22:35 GMT)

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