Restoration Hardware Holdings Inc (RH), Williams-Sonoma, Inc. (WSM): Restore Your Portfolio With This Company

Restoration Hardware Holdings Inc (NYSE:RH) is becoming the go-to store for high-end furnishings. The housing rebound is particularly strong in the luxury real estate market and those buyer’s like Restoration Hardware’s furniture and fixtures for the home. The company’s style of early 20th century with a modern twist works well in the interior design of many different home styles.
Restoration Hardware Holdings Inc (NYSE:RH)

What’s going on?

For Restoration Hardware Holdings Inc (NYSE:RH), this is the second time being a publicly traded company. The company went private for $175 million in 2008. Last November, its private equity owners took the company public at $23 per share and the stock has been a stellar performer ever since.

The stock continued its ascent last week when it rallied more than 16% after releasing its earnings report for the first quarter and raised its outlook for the second quarter. Comparable-store sales rose 41% and direct revenue rose 38%. This is on top of heady gains last year where comparable-store sales rose 26% and direct revenue rose 20%. Sales have risen at least 10% in 13 straight quarters. If analysts thought last year’s growth was impressive, the company looks to grow even faster this year.

What is the company doing to continue its growth pace?

According to chairman Emeritus Gary Friedman:

We are in the very beginning stages of our growth story. Our results today have been restricted by the fact that our assortment has been trapped in legacy real estate that was designed for an entirely different company.

In other words, the company is adjusting its new store formats to be completely different from before. The new real estate strategy will include becoming an anchor tenant at high-end shopping centers. The new stores will have a larger-format than its old stores and measure roughly 21,500 square feet. This is more than three times the size of the format for the old Restoration Hardware Holdings Inc (NYSE:RH) stores.

Restoration Hardware Holdings Inc (NYSE:RH) is also making other key strategic moves to keep growing. The company just poached a 30-year veteran from rival Williams-Sonoma, Inc. (NYSE:WSM) to be the chief merchandising officer for its new kitchen and tableware assortment business. This is the company’s efforts to break into this $25 billion market. Restoration Hardware Holdings Inc (NYSE:RH) is also opening an antiques section and opening an art gallery in New York to target the contemporary art market.

The result of all these efforts explains management’s bullish outlook going forward. Sales are now forecast to be $380 million for the second quarter compared to prior expectations of $351 million. Earnings per share for the second quarter are now expected to come in at $0.42 compared to $0.38 estimated previously. The outlook for the company going forward is indeed bullish.

What about competitors?

Besides Williams-Sonoma, Inc. (NYSE:WSM), the company also competes with Pier 1 Imports Inc (NYSE:PIR). Neither company has the presence though in the high-end furniture market like Restoration Hardware. Williams-Sonoma, Inc. (NYSE:WSM) is primarily in the kitchenware business, which Restoration Hardware is now looking to venture into. Pier 1 Imports Inc (NYSE:PIR) is more known for its fixtures and home décor. The one thing that all three companies have in common is that housing is rebounding and that increases demand for home items.

Williams-Sonoma, Inc. (NYSE:WSM) has built a strong kitchenware business that is seeing increased demand through its online-sales division. Generally consumers know what tableware they like and don’t necessarily need to see the plates or knives in person. That allows them to conveniently shop online with a point and a click. According to an analyst report from Canaccord Genuity, the e-commerce business can boost EBIT margins by 10 basis points this year. Prior expectations were for margins to be flat this year. Earnings per share are now expected to be $0.06 higher at $2.80 per share and long-term forecasts are now 15% higher.

To continue growing its catalog business, Williams-Sonoma, Inc. (NYSE:WSM) has hired RR Donnelley & Sons Co (NASDAQ:RRD) to provide printing and logistics services for all its catalogs. RR Donnelley & Sons Co (NASDAQ:RRD) will also help with other direct-mailing services as Williams-Sonoma continues its aggressive marketing push. Outsourcing the catalog business is a smart move for Williams-Sonoma, Inc. (NYSE:WSM) as RR Donnelley & Sons Co (NASDAQ:RRD) is an expert in helping retailers with their catalog businesses.

Pier 1 Imports Inc (NYSE:PIR) continues to benefit as well from the strong home furnishings market. The company has been working hard to attract more customers. Pier 1 Imports Inc (NYSE:PIR) has expanded its merchandising, reformatted stores, and expanded its online offerings. The company also has instituted a loyalty card program that is helping lure shoppers into the stores. As a result, earnings are forecast to grow more than 18% this year.

What I like about Pier 1 Imports Inc (NYSE:PIR) is that the company is the only one of the the three that pays a dividend. The company pays an annual dividend of $0.20 per share, which is an increase from $0.18 per share previously. The yield is only 0.8%, but there’s room for it to grow as the dividend payout ratio is only 14%. The company just authorized a $100 million share buyback and the balance sheet is in great shape. There’s almost $232 million in cash and only $9.5 million in debt. I see the company continuing to return more cash to shareholders.

What is the Foolish assessment?

I think these specialty retailers have a great niche in the home goods section. My favorite though is Restoration Hardware Holdings Inc (NYSE:RH). It is growing the fastest of the three and has the most upside in my opinion. But all three should continue to benefit as the economy continues to strengthen.

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Williams-Sonoma.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Restore Your Portfolio With This Company originally appeared on is written by Mark Yagalla.

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