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Bull of the Day: Restoration Hardware (RH)

Kevin Cook

Ready for a high-growth home goods retailer that just went on sale? Then it's time to check out the high-end story at Restoration Hardware (RH).

The $2.6 billion luxury home furnishings retailer offers a private-label assortment that is rich in fashion but reasonably priced for its target clientele. It is a true multi-channel retailer that sells its furniture, lighting, decor, bathware, and outdoor and garden products through 71 retail locations that it calls design galleries and 13 outlet stores, which together account for 55% of sales.

Rounding out the customer engagement is a strong e-commerce platform that accounts for the remaining 45% of sales, which include child and baby products.

A Beat and Surprising Drop

RH reported earnings this week and continued its strong performance with impressive second-quarter fiscal 2013 results. The company's adjusted quarterly earnings of 49 cents a share handily surpassed the Zacks Consensus Estimate of 42 cents and jumped 48% year over year.

But the stock got slammed down 12% after the report because including one-time items the company actually reported a loss. There may have also been some investor uncertainty about another company decision: eliminating the splashy and expensive fall catalog. It seems this struck many as having a potential negative effect on revenues.

Why the Dip is a Buy

When you look at the important details of this quarter's report, the company's guidance, and the analyst reaction, you might conclude that RH is a good buy now -- if you don't mind paying 35X for a 30% grower with an innovative management team focused on extraordinary customer experiences.

Increased product demand led to a 30% jump in total sales to $382.1 million that surpassed the Zacks Consensus Estimate of $375 million. Comparable-store-sales surged 26%, while Direct revenues increased 33% during the quarter.

Gross profit rose 22% to $139.2 million, while gross margin contracted 260 basis points to 36.4%. Adjusted EBITDA soared 42% to $40.8 million, whereas adjusted operating income jumped 56% to $34.2 million.

Encouraged by the strong quarterly results, Restoration Hardware raised its fiscal-2013 guidance for the second time. The company now expects top-line improvement in the range of 31% to 32% to $1.56-$1.58 billion, up from its earlier guidance range of a 23% to 27% increase. Moreover, earnings are forecast in the range of $1.65 to $1.70 per share, significantly rising from its previous guidance range of $1.41 to $1.47.

For the third quarter, total sales are expected in the range of $385 million to $395 million, while earnings are projected to range from 27 cents to 29 cents per share. Moreover, for the fourth quarter, the top line is expected to be in the range of $490 million to $500 million, while earnings are expected in the range of 81 cents to 84 cents.

Following this upbeat raise in forward guidance, several analysts scrambled to raise their earnings estimates taking the consensus for this year to $1.68 from $1.48 and next year to $1.93 from $1.86.

Growth Outlook Restored

Looking ahead for this exciting brand that has captured the hearts and wallets of a growing upper-income clientele, several initiatives like product expansion and innovation, enhancement of customers' shopping experience, and its no-brainer plans to secure a foothold in the Kitchen and Antiquities segment are expected to accelerate sales growth in the long run.

Here is what one analyst said about the company's strategy with discontinuing the expensive catalog...

The decision to eliminate the sourcebook (catalog) was fully vetted. Management indicated that it tested this decision for two years and found that there was minimal sales erosion from not re-mailing a book to customers. We believe a reallocation of spend to direct marketing should close the gap if not eliminate it completely. Our concerns about the fall book elimination were further eased by the $80mn increase in full-year sales guidance midpoint to midpoint, after a 2Q outperformance of only $4.6mn.

While the housing market takes a breather in its strong, multi-year recovery, rest assured that consumers are still opening their wallets to spend on products that improve, beautify, and otherwise restore their pride in their homes. In this light, Restoration Hardware is a long-term growth story to take advantage of on the dips.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio. RESTORATION HDW (RH): Free Stock Analysis Report Zacks Investment Research