Restoration Hardware (RH) Sinks On Dismal View: What Next?

Shares of Restoration Hardware Holdings, Inc. (NYSE:RH) plunged nearly 19% in after-hours trading session on Dec 8. Investors punished the stock following the sharp decline in earnings and a dismal fiscal 2016 projection thereafter. In fact, we have observed that the stock has nosedived roughly 57% in the past one year, when the Zacks categorized Retail-Home Furnishings industry has witnessed a decline of approximately 27%.

The company reported fiscal third-quarter 2016 earnings per share of 20 cents significantly down from the year-ago figure of 65 cents. However, it managed to surpass the Zacks Consensus Estimate of 16 cents.

Quarter in Detail

Revenues increased 3.2% to $549.3 million, beating the Zacks Consensus Estimate of $533 million. Restoration Hardware’s comparable brand revenues, including direct revenues, declined 6% year over year compared with 7% increase last year. The company’s direct revenues dipped 3% to $242.5 million, whereas stores revenues jumped 9% to $306.8 million.

Meanwhile, adjusted operating income in the reported quarter declined sharply from the prior-year figure of $50 million to $18.1 million. Adjusted operating margin contracted 610 basis points to 3.3%.

Store Update

At the end of the fiscal third quarter, Restoration Hardware operated 85 retail outlets. These included 51 legacy galleries, six large format galleries, seven next generation design galleries, one RH Modern Gallery and five Baby & Child galleries. Further, the company has 15 outlets across the U.S. and Canada.

Balance Sheet

Restoration Hardware, which shares space with Williams-Sonoma Inc. (NYSE:WSM) , ended the quarter with cash and cash equivalents of $55.4 million, merchandise inventories of $776.6 million and total shareholders’ equity of $902.2 million. Additionally, the company had convertible senior notes (net) worth $308.6 million (due in 2019) and $231.9 million (due in 2020) at the end of the quarter.

RESTORATION HDW Price, Consensus and EPS Surprise

RESTORATION HDW Price, Consensus and EPS Surprise | RESTORATION HDW Quote

Will the Share Continue to go Down the Hill?

It seems very unlikely for the stock to rebound in the near term, as the company has commenced fiscal fourth-quarter 2016 on a soft note. Restoration Hardware announced that sales in November failed to meet the expectations primarily due to consumer softness associated to the U.S. election. November sales were also hampered by delay in distribution of its Fall 2016 Source Books. Moreover, the company is witnessing lower-than-expected holiday sales.

Based on the above factors, the company lowered its fiscal 2016 guidance. Revenues are expected to be in the range of flat to up 1%, down from the earlier guidance of up 1% to 3%. Adjusted earnings per share are anticipated to be between $1.19 and $1.29 in comparison to prior forecast of $1.60 to $1.80. Restoration Hardware expects capital expenditure to be in the range of $180 million to $190 million, down from the prior-year range of $180 million to $210 million.

Fiscal fourth-quarter 2016 revenues are estimated to be in the range of $562 million to $592 million, while earnings per share are expected to be between 60 cents to 70 cents.

The Zacks Consensus Estimate for the fourth quarter and fiscal 2016 is currently pegged at $1.08 and $1.63, respectively, which is likely to witness sharp downward revisions in the coming days.

Zacks Rank & Stocks to Consider

Restoration Hardware currently carries a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the retail space include GMS Inc. (NYSE:GMS) and Tile Shop Holdings, Inc. (NASDAQ:TTS) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Shares of GMS has surged 18.7% in the past three months.

Tile Shop Holdings delivered an average positive earnings surprise of 15.1% in the trailing four quarters and has a long-term earnings growth rate of 25%.

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