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Can Restoration Hardware Keep Up Its Earnings Momentum?

Design Galleries have helped company beat industry growth


During the financial crisis of 2008, Restoration Hardware (RH) went private and launched a grueling restructure that led the furniture retailer to dump many of its mall locations and put its focus on Design Galleries.

That move turned out to be spot-on.

By November 2012, RH was primed to head back to the public markets and executed a highly successful IPO. Priced at $24, the stock ended its first day of trading up 29%, and has since more than doubled to its current price above $56.

However, the question of whether Restoration Hardware can continue leading its shareholders to further profits will be answered this week when the company reports first-quarter earnings.

Wall Street is looking for revenues of $299.2 million, up from $217.9 million in the same period a year ago. The company’s earnings per share is forecast to swing from a loss of 10 cents to a gain of 4 cents.

It’s certainly possible for RH to beat those expectations. The company has been able to maintain pricing power as a top luxury brand. It has also seen a nice boost thanks to the rebound in the housing market — and there are few signs that things are slowing down on that front.

Just how well has RH done since restructuring? In the past three years the company has posted an annual growth rate of 24% — double the industry average of about 12%!

And it’s potential hasn’t been tapped out yet. A key has been RH’s Design Galleries, which offer lots of room to showcase products. So far, there are three locations in operation, but the company thinks it can roll out another 50 in major metropolitan markets.

Yet Restoration Hardware is more than just about launching a spate of new locations. The company’s strategy also involves high-end catalogs and websites. In fiscal 2012, RH distributed 32.7 million catalogs, and the websites logged nearly 19 million unique visitors.

True, RH is frothy, with a forward price-to-earnings ratio of 33, but that valuation is more than justified given the company’s premium brand and expansion opportunities.

Thus, investors who like to take fliers out before earnings reports could do much worse than speculating with RH.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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