Entering into Wednesday afternoon’s first-quarter earnings announcement, Restoration Hardware Holdings Inc (RH) stock was already struggling. Unfortunately, first-quarter results aren’t going to turn that situation around; RH stock is down another 16% in after-hours trading.
By Wednesday’s close, shares of the luxury home furnishings retailer were already down a whopping 54% in 2016, as a skeptical market refused to send RH stock higher. You see, the last time Restoration Hardware reported quarterly results, they were similarly disappointing. That time, RH blamed the weak performance on the volatile stock market, which pressured sales to high-end customers.
Clearly, the markets didn’t totally buy that rationale last time — RH stock plunged 23% after the company gave that lame excuse in late February. The caution proved well-deserved, as you can see by the current price action.
Let’s take a look at Restoration Hardware’s awful quarter ended April 30, 2016 — its second miserable quarter in a row.
There’s Trouble Brewing With RH Stock
Restoration Hardware is making a nasty habit of missing on earnings — badly. RH stock lost an adjusted 5 cents per share on revenue of $455.5 million. Analysts were expecting adjusted earnings per share (EPS) of 5 cents on revenue of $452.1 million.
Just a year ago, RH stock earned 23 cents per share, so to swing to a loss — when revenues themselves were actually up 8% — is pretty lousy.
Restoration Hardware Chairman and CEO Gary Friedman mentioned a few reasons business has been so bad:
“Our near term business performance is being pressured by the continued headwinds in the markets impacted by energy and currency, as well as a general slowdown in the luxury consumer market.”
Friedman also noted that by the company moving from a promotional to a membership model, for which they’ve introduced the RH Grey Card, they’re learning a few tough lessons:
“…we are learning that the selling cycle with members is longer, as transactions are not closed with the urgency of artificially imposed sale deadlines, and the timing of recognizing membership revenues will put pressure on margins in the short term…”
To his credit, Friedman did say that he was pleased with the early adoption rate and order size, but Wall Street just doesn’t see RH stock with the rose-colored glasses that Mr. Friedman does.
Alas, the most painful part of Wednesday’s earnings report was actually the company’s outlook.
RH stock owners must have cringed in horror when they saw the full fiscal year’s EPS guidance, which was revised downward by between $0.90 and $1.00 to the $1.60 to $1.80 range. The consensus full-year EPS estimate for RH stock was $2.66 going into today’s report.
Not only is it disconcerting to see such a dramatic, pessimistic revision to EPS guidance in the first place, but it may also make some investors nervously wonder how management was so wrong with their initial predictions. If execs have to dramatically revise guidance every three months, is there something fishy going on or are they just bad at predicting how business will be?
In any case, with RH stock hitting 52-week lows in after-hours action today, it goes without saying that the strong early adoption rate Mr. Friedman sees in Restoration Hardware’s membership model better start showing itself in the financials sooner rather than later if shares are ever going to seriously rebound.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
