Last week, I gave an earnings preview for one of the hottest home retailers out there: Restoration Hardware (RH). Now that the company’s first-quarter earnings have actually been released, it seems like a great time to revisit the results and potential for RH stock.
To start, the earnings highlights: Restoration Hardware posted a 15% year-over-year increase in net revenue, which came on the heels of a 22% increase last year. That translated to adjusted earnings of 23 cents per share versus 18 cents per share a year ago and a consensus of 20 cents per share from the analyst community.
From a stock perspective, it also translated to gains of as much as $3 the day following the report. Things cooled off a bit after that jump, leaving RH still about flat since 2015 started.
But don’t be fooled by that lack of year-to-date gains. If you zoom out, Restoration Hardware — which has the luxury, if you will, of being a differentiated retailer targeting affluent consumers with cash to toss around — has been chugging pretty steadily higher since going public in 2012 and seems to again be regaining its typical momentum. Since the start of May, Restoration Hardware stock has posted a 10% climb versus less than a 1% improvement for the broader S&P 500.
Put another way, you could buy RH stock right now and get that upwards momentum without an absurd premium. Analysts have upped the current full-year consensus estimate for earnings by a dime over last three months alone, while this recent earnings report marked the fourth consecutive beat for RH — and the largest of those four.
Sure, earnings growth is naturally slowing from the breakneck 50% per year pace of the last five years, but the slated 25% growth for second quarter and the longer-term per year growth of 28% is nothing to sneeze at considering RH stock’s forward price-to-earnings ratio is just under 25.
For the cherry on top, that earnings growth could be boosted by a new Restoration Hardware concept that was announced in last week’s earnings report. It’s called “RH Modern” and it’s exactly what it sounds like — the same Restoration Hardware brand and price point, but with a modern twist.
Another interesting twist that comes with RH, though, is the fact that it shrugs at the e-commerce mega-trend. While the sales mix for Restoration Hardware is currently about 50-50 for brick-and-mortar and direct, that could change as the new modern brand and also just-announced “galleries” roll out in coming months.
Cowen analyst Olive Chen, though, is optimistic about both transformations, as Barron’s pointed out — and I agree with him. He writes:
“RH Modern could drive upside … [and] the real estate transformation is key to sales growth long-term as new stores will avg. ~45k selling sq. ft. with annual sales of ~$30M vs. legacy stores at ~7k selling sq. ft. with ~$10M annual sales. As a reminder, the next-gen larger galleries will present a product assortment 6-8x larger than legacy galleries driving a retail sales lift of 2-4x legacy stores.”
The bottom line is that I’m a big fan of Restoration Hardware, whether we’re looking forward or looking back. Investors would be smart to snag some shares and ride this momentum. From a handy earnings beat to big plans for bigger stores, the translation is simple: More sales, more earnings beats, more stock gains.
Plop down on an overpriced Restoration Hardware couch and enjoy the ride.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network, and other media.
