Restoration Hardware (RH) Incurs Loss In Q1, Stock Plunges

Shares of Restoration Hardware Holdings, Inc. (NYSE:RH) plunged nearly 19% in after-hour trading session following the company’s announcement of dismal first-quarter fiscal 2016 quarterly numbers and lackluster guidance. The company reported adjusted loss per share of 5 cents. The Zacks Consensus Estimate was of a profit of 5 cents per share. Also, the company slipped to loss from the year-ago quarter earnings of 23 cents per share.

GAAP loss in the reported quarter came in at 33 cents per share. Restoration Hardware had posted earnings of 17 cents per share in the prior-year quarter.

The company’s quarterly result was negatively impacted by energy and foreign currency headwinds and also due to slow down in the luxury consumer market.

Earlier, the company launched two businesses – RH Modern and RH Teen. While the RH Modern division focuses on manufacturing luxury furniture with a modern twist, RH Teen makes superior quality furniture, linens, lightning and decor for teens.

This apart, the company has adopted various initiatives like product category expansion, store transformations and multi-channel platform as well as infrastructure enhancement to drive growth.

Quarter in Detail

Though revenues increased 7.8% to $455.5 million, the figure lagged the Zacks Consensus Estimate of $459 million. This is the third consecutive revenue miss for the company.

Restoration Hardware’s comparable brand revenues, including direct revenues, went up 4% year over year compared with 15% increase last year. The company’s direct revenues dipped 4% to $199.4 million whereas stores revenues jumped 19% to $256.1 million.

Meanwhile, adjusted operating income in the reported quarter declined sharply from the prior-year figure of $18.6 million to $0.7 million. Adjusted operating margin contracted 420 basis points to 0.2%.

Store Update

At the end of the fiscal first quarter, Restoration Hardware operated 69 retail outlets. These included 53 legacy galleries, six large format galleries, four next generation design galleries, one RH Modern Gallery and five Baby & Child galleries. The company also has 19 outlets across the U.S. and Canada.

Balance Sheet

Restoration Hardware, which shares space with Williams-Sonoma Inc. WSM, ended the quarter with cash and cash equivalents of $237.2 million, merchandise inventories of $763.1 million, and total shareholders’ equity of $879.5 million. The company also had convertible senior notes (net) worth $301.3 million due in 2019 and $223.9 million due in 2020 at the end of the quarter.

Outlook

The company’s fiscal 2016 results will be negatively impacted by short-term operational items that include costs allied with RH Modern production interruptions. The company will also invest to enhance customer experience. However, this will reduce the company’s revenues by nearly $16–$17 million and adjusted earnings per share (EPS) by 90–$1.00 in fiscal 2016.

For fiscal 2016, management projects net revenue growth in the range of 1% to 3%. The company expects adjusted EPS to be between $1.60 and $1.80 per share. Capital expenditures are projected in the range of $180 million to $210 million. The Zacks Consensus Estimate for fiscal 2016 currently stands at $2.65 but is likely to witness a sharp downward revision in the coming days.

For the fiscal second quarter, the company expects net revenue in the range of $505–$520 million compared with $507 million in the prior fiscal. Adjusted EPS is likely to be between 28 cents and 33 cents as against 85 cents in the second quarter of fiscal 2015. The Zacks Consensus Estimate for the fiscal second quarter is currently pegged at 80 cents per share but is likely to witness a sharp downward revision in the days ahead.

Zacks Rank & Stocks to Consider

Restoration Hardware currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the retail sector include Ethan Allen Interiors Inc. (NYSE:ETH) and Haverty Furniture Companies Inc. (NYSE:HVT) . Both the stocks hold a Zacks Rank #2 (Buy).