The company has a number of positive drivers behind it. It marries a recovering housing market with the spending power of the high-end consumer and a collection of ongoing operational improvements along with new category launches. In summary, it is well worth a look for anyone wanting to get exposure to the sector.
Restoration Hardware Holdings Inc (NYSE:RH) upgrades
Before going into details, I want to outline the changes to guidance. Note that these changes were made on May 10, having been previously been issued on April 18.
1). Q1 Revenue guidance of $295 million-300 million versus $280 million-285 million.
2). Q1 adjusted diluted EPS guidance of $0.02 to $0.04 versus $(0.02) to break-even.
3). Q1 Adjusted net income guidance of $900,000 to $1 million versus $(1) million to break-even.
4). The increase in Q1 guidance is expected to be incremental to the full year guidance, so start penciling in upgrades folks.
For the sake of clarity, the existing full year guidance is $1.42 billion -1.45 billion in revenue and $1.29-1.37 in adjusted EPS.
It’s an impressive hike and the company lost no time in announcing on the May 14 that it would launch a follow-on offering of 7.5 million shares to be sold by existing stockholders. The business appears to be firing on all cylinders, so what should investors look out for going forward?
Restoration Hardware Holdings Inc (NYSE:RH)’s growth drivers
I’ve previously discussed the stock in an article linked here which should give some good background reading. Regarding its growth drivers for 2013, I have a few bullet points
1). Increasing the number of its full line galleries
2). Growth from new business launches such as RH Tableware and RH Objects of Curiosity
3). Opening of distribution centers in order to increase capacity and improve service
4). Expanding its baby and child offerings
5). Developing its contemporary art offerings
It’s worth noting that despite the 30% increase in net revenue in Q4, gross margins actually fell 200 bps to 36.5%. This is largely a consequence of the increase in lower margin furniture sales as part of overall revenue. Going forward, investors should look to initiatives like the new business and, in particular, the contemporary art offerings to increase margins as they contribute more as a share of revenue. No matter the revised Q1 guidance implies 35%-38% revenue growth.
With that said, the key to its growth will be the increasing number of full line galleries. I note that previously, the company argued that only 25% of its current assortment was being displayed in retail galleries, but it recently quoted a figure of 20% (and below 15% if baby and child categories were included).
The opportunity is to expand retail space (via full line galleries) and maximize the potential in its overall assortment. Indeed, it declared that the first three full line galleries in LA, Scottsdale and Houston were outperforming expectations, and with new galleries being opened this year, we can expect more of the same.
What the Industry is saying
It is certainly not alone in reporting good numbers, although I note that other companies have differing operational improvements planned in order to benefit from an improving housing market. For example Pier 1 Imports, Inc. (NYSE:PIR) is following a strategy of expanding its e-commerce activities and in store point of sales systems in order to drive new channel growth. Meanwhile its Q4 same-store sales numbers came in at an impressive 7.5%. My longer term concern here would be that its e-commerce activities might cannibalize its in-store offerings and place extra pressure on it to innovate in order to achieve product differentiation.
Another good indicator for Restoration Hardware Holdings Inc (NYSE:RH) is Williams-Sonoma, Inc. (NYSE:WSM). It has seen good growth in its pottery barn kids and teens categories, and in addition to expanding its e-commerce and direct to consumer sales channels (now 46% of total sales), it has an ongoing international expansion plan. However it also needs to keep a focus on achieving product differentiation because online specialists like Amazon.com, Inc. (NASDAQ:AMZN) are entering the space. Just like Pier 1 Imports, Inc. (NYSE:PIR), the company is targeting mid to high single digit revenue growth. Impressive stuff.
And finally, I think Bed Bath & Beyond Inc. (NASDAQ:BBBY) is worth a mention. I think it has been the business most challenged by online competition and is finding it difficult to hold onto margins. With that said, it too is shifting to offering multi-channel distribution amid launching new websites and integrating acquired business. Rather, like Restoration Hardware Holdings Inc (NYSE:RH), it offers some upside from improvements in operational efficiency, but on the downside, it also has a lot more specific competitive activity (Amazon et al) potentially targeting its revenue base while its growth has been less than stellar in recent times.
The bottom line
In conclusion, I think momentum is with the sector and it is a favorable time to be invested in it. Analysts will likely raise full year estimates so the top end of existing company guidance at $1.37 looks beatable. At least I would hope so, because at the current price, it puts it on a forward evaluation of 37 times earnings.
It’s not the sort of stock or evaluation that I would chase, but we have all seen how some stocks can perform when momentum is behind them and they are raising guidance. Don’t be surprised to see this stock higher by the year end, but be prepared for some significant downside if it misses any numbers and the growth story loses its luster.
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The article Plenty of Growth Drivers for This Housing Play originally appeared on Fool.com and is written by Lee Samaha.
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