Home furnishing companies are usually a good short-term play as spring starts to bloom.
People are buying and selling homes, the nice weather has homeowners thinking about home improvements, and investment property owners — both residential and commercial — are looking to spruce up their investments.
That's all good news for home furnishing companies, which tend to see revenues rise as the ice melts and opening day beckons across U.S. ball fields.
But there is one home furnishings provider that really stands out in the crowd this week, in the key first week of April.
It's Restoration Hardware Holdings (NYSE: RH), and not only are its short-term financial prospects looking as solid as a granite countertop, its long-term prospects look equally strong.
That spells opportunity for investors, so let's dig a little deeper and examine why.
RH bills itself as a retailer of home furnishings, providing bedroom, dining, upholstery, home office, and media furniture products. It also offers cabinets; ceiling, table, floor, wall, and outdoor lighting products; textiles, such as bed linens, bath linens, drapery, rugs, and pillows and throws; and bath ware products comprising faucets, hardware, furniture, and sinks.
That pretty much covers the home furnishings product line from A-to-Z.
The firm has 71 retail stores, and 13 outlet stores across the U.S., but it also makes a lot of hay selling items through its catalog and web site outlets. The company's chief competitors include Pier 1 Imports (NYSE: PIR) and Williams-Sonoma (NYSE: WSM).
Financially, investors might have reservations about RH, at first blush. Q4 revenue figures came in slightly less than analysts had forecast ($471 million versus $491 million), but most investors evidently wrote-off the missed forecast due to the historically icy, frosty, snowy, and chilly months of December and January.
Bu! t a look inside the numbers reveals why there is a groundswell of support for Restoration Hardware (a trend that I believe will continue).
First, year-to-year revenues were up 18%, which is a nice figure considering the bleak winter conditions across the U.S. that kept consumers out of stores and malls. Even worse, it kept them from even thinking about home improvement projects, a grim prospect for any retailer that makes its mark convincing homeowners any time of year is a good time to buy a new living room set or to remodel a man cave.
In addition, same store sales were up 17% over the same time frame.
Wells Fargo analyst Matt Nemer called RH's Q4 comparable sales near the top of the list for all retailers for the quarter. “Restoration displayed expense flexibility usually reserved for larger companies and was able to keep SG&A (selling, general and administrative) dollars flat to Q3 to adjust for the softer sales,” Nemer wrote in a research note.
Some other key takeaways from the year-to-year numbers include:
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But it's the longer term tha! t should ! really appeal to stock watchers.
Restoration also released its Q1 revenue outlook, which called for EPS of 9-to-11 cents, well ahead of Wall Street estimates of 7 cents. Revenue should clock between $345 and $350 million this year, compared to the Street consensus of $350million. For fiscal 2014, Restoration Hardware said it sees adjusted EPS of $2.14-to-$2.22, versus the Street consensus of $2.17, while FY14 revenue is expected to be $1.83 billion-$1.86 billion, compared to a forecast of $1.89 billion by analysts.
Those figures may seem flat at first glance, but RH significantly upped its 2014 outlook from the last time it posted estimates, back in December, 2013. Now, Restorations looks like it will meet consensus expectations from the investment community, and surpass it in key areas like EPS.
Maybe that's why Gary Friedman, chief executive officer at Restoration, was so bullish on the Q4 numbers, and the outlook going forward, last week. "Throughout fiscal 2013, we continued to take market share and outperform our expectations, delivering results that far exceeded the annual financial targets we introduced at the beginning of the year," he said.
But it's this year where Friedman believes his company will really take off.
"In 2014, we remain focused on our two largest value driving strategies: the expansion of our offer and the transformation of our retail stores," he adds. "In regards to the transformation of our retail stores, we believe we have a $4 billion to $5 billion company trapped in billion dollar legacy real estate." That's a big reason why Friedman says Restoration is morphing its real estate portfolio into a next generation "full line design galleries." Brand new outlets are expected to open in Greenwich, Conn., Los Angeles, and Atlanta.
Restoration has signed for five more galleries to open in 2014, and is in negotiations to open 25 more across the U.S.
"Once our real estate transformation is complete in North Amer! ica, we b! elieve we will deliver $4 billion to $5 billion in annual sales, achieve mid-teens operating margins, and generate significant free cash flow," he says.
So count me in on the Restoration Hardware upgrade. It should spruce up your portfolio, too, in 2014.
Brian O'Connell is an investment analyst at Investing Daily and chief investment strategist of 401k Millionaire. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.
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