Why Restoration Hardware Was Among Last Week's Biggest Winners

By Motley Fool Staff Markets Fool.com

In this segment from Motley Fool Money, Chris Hill,Jason Moser, and Jeff Fischer try to explain what is making investors so enthusiastic about the home furnishings retailer, despite some worrying numbers from its latest quarter. But as is often the case, it's the forecast that has investors' attention. Can the membership model really drive long-term growth?

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A full transcript follows the video.

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This video was recorded on March 31, 2017.

Chris Hill:One of the biggest winners on the New York Stock Exchange this week wasRestoration Hardware(NYSE: RH). Shares up 25% after a fourth quarter report that included a pretty big drop in same-store sales, Jason. Why the enthusiasm?

Jason Moser:I think the market is probably looking past that same-store sales metric and looking at the projections for the fiscal year upcoming. They're projecting anywhere in the neighborhood of$1.78 to $2.19 in earnings per share. So, take that at the midpoint, the stock is trading at about 24 times forward estimates, which isn't all that absurd, really, for acompany that sells pretty high-end retail goods. Now, that is a limited customer base. To me, it's interesting, the membership model pivot that they've made this past year here. It's an interesting lever they can pull in the short run, because I think it does help stoke results. I'm still skeptical that it's actually something that leads to sustained, long-term success and growth. It's very easy to justify paying for that membership when you go to buy something from Restoration Hardware. You buy something for $1,000, you're going to get 25% off of it just for buying that $100 membership. So, the numbers make sense right then and there. And I would also argue that, probably, most people that are shopping at Restoration Hardware, $100 isn't going to make or break them, either. So then, you have to ask yourself, longer term, years down the road, how are the renewal numbers looking with this program? That's what I would focus on more than anything else. At the end of the day, it is a retailer, it is a high end retailer, and I think those problems are not quite as easily solved. I do think the membership model is an interesting one, I think it's a neat effort there. But I would pay more attention to the renewal numbers in the coming years to see if it's really gaining any traction.

Jeff Fischer:Yeah, the membership model is interesting, Jason, because in a way, they are gaming the system. Just go to their website, there's a chandelier for $5,900 regular price, and it's only $4,400 if you're a member. So, are you going to join for $100?

Moser:You're going to buy a 25% coupon for $100. The chance is, you'reprobably going there that one time that year, you probably won't step foot in that store again for maybe a year. Then, that renewal comes up, and you're scratchingyour head wondering, why did I get this in the first place, and do I really need it for this coming year? I don't know.

Fischer:I think you're right that it comes down to, what will renewals be? But even more than that, will having that membershipand then receiving mailings from Restoration over time drive you togo back and buy more. You're like, "Hey,I paid for the membership,I'll buy a new rug there."

Moser: I have the solution. Just a little free streaming on the side,some video, some music. That's a little value add right there. You're using that on a daily basis. They could probably giveAmazona run for their money. Why not?!

Chris Hill owns shares of Amazon. Jason Moser has no position in any stocks mentioned. Jeff Fischer owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.