Restoration Hardware Holdings Inc (RH), Pier 1 Imports, Inc. (PIR): Plenty of Growth Drivers for This Housing Play

Page 1 of 2

Restoration Hardware Holdings IncIt’s been a pretty good earnings season for the home furnishings industry, and Restoration Hardware Holdings Inc (NYSE:RH) continued the good cheer by upgrading its Q1 guidance only a few weeks after reporting an impressive set of full year results.

The company has a number of positive drivers behind it. It marries a recovering housing market with the spending power of the high-end consumer and a collection of ongoing operational improvements along with new category launches. In summary, it is well worth a look for anyone wanting to get exposure to the sector.

Restoration Hardware Holdings Inc (NYSE:RH) upgrades

Before going into details, I want to outline the changes to guidance. Note that these changes were made on May 10, having been previously been issued on April 18.

1). Q1 Revenue guidance of $295 million-300 million versus $280 million-285 million.

2). Q1 adjusted diluted EPS guidance of $0.02 to $0.04 versus $(0.02) to break-even.

3). Q1 Adjusted net income guidance of $900,000 to $1 million versus $(1) million to break-even.

4). The increase in Q1 guidance is expected to be incremental to the full year guidance, so start penciling in upgrades folks.

For the sake of clarity, the existing full year guidance is $1.42 billion -1.45 billion in revenue and $1.29-1.37 in adjusted EPS.

It’s an impressive hike and the company lost no time in announcing on the May 14 that it would launch a follow-on offering of 7.5 million shares to be sold by existing stockholders. The business appears to be firing on all cylinders, so what should investors look out for going forward?

Restoration Hardware Holdings Inc (NYSE:RH)’s growth drivers

I’ve previously discussed the stock in an article linked here which should give some good background reading. Regarding its growth drivers for 2013, I have a few bullet points

1). Increasing the number of its full line galleries

2). Growth from new business launches such as RH Tableware and RH Objects of Curiosity

3). Opening of distribution centers in order to increase capacity and improve service

4). Expanding its baby and child offerings

5). Developing its contemporary art offerings

It’s worth noting that despite the 30% increase in net revenue in Q4, gross margins actually fell 200 bps to 36.5%. This is largely a consequence of the increase in lower margin furniture sales as part of overall revenue. Going forward, investors should look to initiatives like the new business and, in particular, the contemporary art offerings to increase margins as they contribute more as a share of revenue. No matter the revised Q1 guidance implies 35%-38% revenue growth.

With that said, the key to its growth will be the increasing number of full line galleries. I note that previously, the company argued that only 25% of its current assortment was being displayed in retail galleries, but it recently quoted a figure of 20% (and below 15% if baby and child categories were included).

The opportunity is to expand retail space (via full line galleries) and maximize the potential in its overall assortment. Indeed, it declared that the first three full line galleries in LA, Scottsdale and Houston were outperforming expectations, and with new galleries being opened this year, we can expect more of the same.

What the Industry is saying

It is certainly not alone in reporting good numbers, although I note that other companies have differing operational improvements planned in order to benefit from an improving housing market. For example Pier 1 Imports, Inc. (NYSE:PIR) is following a strategy of expanding its e-commerce activities and in store point of sales systems in order to drive new channel growth. Meanwhile its Q4 same-store sales numbers came in at an impressive 7.5%. My longer term concern here would be that its e-commerce activities might cannibalize its in-store offerings and place extra pressure on it to innovate in order to achieve product differentiation.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!