Restoration Hardware Reaches New High On Upgraded Guidance And Triple-Digit Earnings Growth
Shares of Restoration Hardware surged 15% in after-market trading to $82 apiece, after the company surpassed analysts’ expectations for its first quarter and raised its outlook for the full year
Restoration Hardware Holdings Inc (RH) gained over $400 million in market valuation in extended trading after the company announced another quarter of meteoric growth. The luxury retailer of home goods topped analysts’ estimates for revenues and earnings, and its upgraded guidance also came out ahead of the Street’s estimates.
Outstanding First-Quarter Results
The Corte Madera, California-based retailer announced a 22% growth in revenues, which were $366.3 million for the first quarter of its fiscal 2014 (1QFY14; ended May 3, 2014). The company had recorded sales of $307.3 million in the comparable period last year. The company beat its own expectations, as well the Street’s revenue projections of $346.7 million, due to product expansion, and refurbished and bigger stores.
In the preceding quarter, the company had recorded an 18% growth in its comparable brand revenues, which were also much higher than the consensus estimate. The metric, which eliminates the impact of new store openings, is a more accurate measure of retailer’s sales growth.
The company, which went public in November 2012, is boosting its sales by adding unique product offerings to its portfolio. In order to distinguish itself from other retailers, the company is diverting from the traditional mall-based store format to large-sized stores that it calls “Full Line Design Galleries.”
Restoration Hardware’s management is pleased with the initial response from its recently inaugurated Design Gallery in Greenwich, and is on track to open two new-format stores in Los Angeles and Atlanta this year. The management senses an opportunity to generate revenues of as much as $5 billion due to the store format changes. In the earnings call yesterday, Restoration Hardware CEO Gary Friedman disclosed that the company is in the process of negotiating leases for 25 more Design Galleries.
The company, which also generates revenues by sales made through its e-commerce website and purchases that customers make after viewing Restoration Hardware’s catalogs, posted growth of 24% in direct revenues. It also recently introduced a 3000-page Source Book, which the company believes will generate incremental revenues through a better and more comprehensive presentation of its products.
Restoration Hardware’s adjusted earnings per share (EPS) for the quarter tripled from 1QFY13 to 18 cents. Overall non-GAAP net income jumped to $7.2 million, from $2.3 million in 2013. The Street was expecting adjusted net income of $4.1 million, or 14 cents.
The gross margin expanded by 20 basis points (bps) to 34%, and operating margins improved by 110bps to 1.3% in the three-month period.
Restoration Hardware Raises Outlook
Looking forward, the management upgraded its guidance for the entire FY14. "The business momentum and strong trends we are seeing thus far in 2014 give us further confidence in our financial outlook for the year," said Friedman.
For the year, the management now expects adjusted EPS of $2.24-2.30, assuming revenues of $1.86-1.89 billion. This reflects top-line growth of 21% and bottom line growth of 27%. Analysts, on the other hand, had projected sales of $1.87 billion and EPS of $2.24 – in the lower range of the guidance. In March, the management had issued EPS and revenue guidance of $2.14-2.22 and $1.83-1.86 billion, respectively.
For the ongoing quarter, the management forecasts EPS in the range of 62-64 cents, and sales of $443-453 million. Analysts surveyed by Bloomberg had projected EPS of 62 cents and revenues of $455 million.
Including the post-market gain of 15%, the company’s shares have rallied 22% year-to-date. Its shares are currently priced at 29 times the company’s projected earnings for the next twelve months. On the contrary, its closest peer, Williams-Sonoma, Inc. (WSM), is trading at a price-to-earnings multiple of 20x.
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