This Once-Endangered Retailer’s Restoration Is Complete

Traditional retailers have struggled in recent years from the e-commerce revolution, and few niches of the retail industry have been able to escape the effects. For RH (NYSE: RH), formerly known as Restoration Hardware, 2016 was almost the kiss of death. High-end luxury customers proved vulnerable to plunging crude oil prices that devastated economic expansion in energy-rich regions of the country.

Yet rather than give up, RH took on a remodeling project for its entire business model. And despite skepticism from many corners about whether the efforts would succeed, the home-furnishings retailer has completed a monumental comeback that has now sent its stock to new all-time highs.

Coming into Monday’s fiscal first-quarter financial report, RH investors were confident that the company’s efforts would produce immense bottom-line growth and point toward sales rebounds as well. RH’s actual earnings numbers were far better than those expectations, and upgrades to its guidance point to a brighter future as well. As long as the home-furnishings company can keep tapping into the demand triggers that are resonating so well with its customers, RH will be in a good position to sustain its recovery.

Image source: RH.

RH hits the ground running

Restoration Hardware’s first-quarter results were consistent with the strategic initiatives that the retailer had set out for the fiscal year. Revenue eased lower by 1% from year-ago levels to $557.4 million, falling short of the roughly break-even performance that most of those following the stock had expected. Yet RH turned around a year-ago loss with net income of $28.1 million. And even after accounting for some extraordinary items, adjusted earnings of $1.33 per share were far higher than the $1.03 per share consensus expectations among investors.

The magnitude of RH’s recovery is hard to overstate. Adjusted net income of $33.5 million was more than triple RH’s previous first-quarter record. The retailer noted that even though it made extraordinary efforts to reduce inventory in the year-earlier period, comparable brand revenue was higher year over year by 1%. Moreover, supply-chain streamlining has made the retailer more efficient, giving RH a better model for deploying its working capital effectively. Adjusted operating margin soared to 9.6%, double its previous first-quarter record.

Steady, measured expansion continues to be an area on which RH is focusing its attention. The company replaced legacy locations in the western cities of Portland, Oregon, and Scottsdale, Arizona, with much larger retail galleries, and it added an RH Modern location in Dallas. Overall, that brought RH’s store count to 84, and it’s clear from the disciplined rate of growth that the company is committed to focusing on earnings first and revenue growth second.

Can RH keep soaring?

CEO Gary Friedman explained his rationale for RH’s strategy. “We will restrain ourselves from chasing low-quality sales at the expense of profitability like many in our industry,” Friedman said, “and instead focus on building an operating platform that will enable us to compete and win over the long term.”

Yet Friedman’s long-term vision provides a clarity that’s even rarer among publicly traded companies in general, let alone retailers. With RH members receiving thick books of products from RH Interiors and RH Modern, the company expects new collections to gain traction in the key spring season. Improvements in distribution, delivery, and order management should offer a better customer experience, and new locations in New York and the Napa Valley will emphasis RH’s luxury focus. By 2019, RH expects to move back toward growing revenue by extending its newly developed brands into additional market opportunities.

RH raised its guidance accordingly. Revenue projections remained unchanged at $2.53 billion to $2.57 billion, but new predictions for $6.34 to $6.83 per share in earnings were well above the $5.45 to $6.20 range that RH had given three months ago. For the fiscal second quarter, revenue of $655 million to $662 million would represent growth of roughly 6% to 7% from year-ago levels, and earnings of $1.70 to $1.77 per share on an adjusted basis were quite a bit higher than the $1.51 per share consensus forecast among those following the stock.

RH investors were ecstatic about the report, and the stock jumped more than 20% in pre-market trading Tuesday following the late-Monday announcement. With the move, RH has clearly found a way forward in its plans to cater to the richest clientele available. And in a strong economy, shareholders are optimistic that RH’s game plan will work well over the next couple of years and beyond.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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