Restoration Hardware Analyst Neutral After Q4 Print, Sees 'Widening Competitive Moat'

Restoration Hardware Holdings, Inc’s RH fourth-quarter results were impacted by a slowdown in its core business, and the company lowered its initial 2019 outlook last week. Yet the retailer's business model and multiyear growth strategy remain strong, according to Raymond James.

The Analyst

Raymond James’ Bobby Griffin maintains a Market Perform rating on Restoration Hardware Holdings.

The Thesis

The home furnishings retail chain posted flattish fourth-quarter revenue of $671 million March 28, short of the consensus estimate of $686 million. Excluding last year's extra operating week, revenues were up around 6 percent, Griffin said in a Monday note.

The revenue miss was on account of the performance of noncomparable stores, with comparable brand revenue growing 5 percent year-on-year, the analyst said.

Despite the revenue shortfall, adjusted EPS came in at $3, handsomely beating the consensus estimate of $2.86.

The furniture retailer announced that it will cease reporting the split between direct and store sales as well as comparable brand revenue. This is not in the best interest of shareholders, Griffin said.

RH also announced first-quarter sales guidance of $582-$588 million, lower than the consensus estimate of $611 million. Adjusted EPS and net income guidance came in at $1.47-$1.58 and $37-$40 million, versus expectations of $1.79 and $48 million, respectively.

RH could face some macroeconomic and geopolitical headwinds in 2019, the analyst said.

The strategy of increasing the number of next-gen Full Line Design Galleries and adding hospitality “creates a new and differentiating shopping experience in the high-end home furnishings industry that is difficult, if not impossible, to replicate online, thereby widening RH's competitive moat," Griffin said.

Feinseth Takes Bearish View

RH's fourth quarter results highlight a change in the company's market environment, analyst Ivan Feinseth from Tigress Financial said in a note.

The stock declined 22 percent on Friday despite the EPS and comps beat. Even the elevated short interest level of 37 percent could not provide support to the stock, the analyst said.

"I don't believe the sell-off is a buying opportunity and believe the stock will trade sideways to lower."