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Home furnishings can be a lucrative niche in the retail business, but as Restoration Hardware (NYSE: RH) has found recently, it can be highly dependent on overall economic conditions. Over the past year, Restoration Hardware has seen its stock plunge on concerns that its customer base has lost its ability to help drive the company's future growth.
Coming into Thursday's fiscal second-quarter financial report, Restoration Hardware investors were prepared for another steep drop in earnings, but they hoped that sales would hold up relatively well. The retailer actually did better than most had expected on its top line, and although it has more work to do before it can claim victory, many shareholders believe that Restoration Hardware is on track. Let's take a closer look at the latest from Restoration Hardware, and what it means about its future.
Restoration Hardware builds some momentum
Restoration Hardware's second-quarter results were more inspiring than investors have seen in recent quarters. Revenue climbed 7%, to $543.4 million, which was far better than the roughly 1% growth rate that most of those following the stock had expected to see from the home-furnishings retailer. The company posted net income of $6.9 million, and although that was down almost 80% from the year-ago quarter, the resulting adjusted earnings of $0.44 per share were $0.15 better than the consensus forecast among investors.
Looking more closely at Restoration Hardware's numbers, you can see several crosscurrents that the company is going through. Comparable-brand revenue fell 3%, but the retailer argued that the 16% increase in the prior year made comparisons difficult. Once again, Restoration Hardware's retail locations did well, posting 15% sales gains. However, direct revenues continued their downward trend, falling 2%, and weighing on the entire company's growth.
Nevertheless, in the company's eyes, Restoration Hardware's temporary sluggishness is setting the stage for future growth. By using fiscal 2016 essentially as a turnaround year, Restoration Hardware is sacrificing its near-term financial results in exchange for longer-term opportunities. In particular, early shipping of certain products helped pull revenue into the fiscal second quarter that the retailer would otherwise have recognized in the fiscal third quarter.
CEO Gary Friedman was pleased with the results and the progress they reflect. "While the degree and pace of innovation at RH might seem ambitious comparatively," Friedman said, "it is the result of years building a culture engineered to be, as Charles Darwin believed, the one most responsive to change." By instilling a culture of innovation at Restoration Hardware, the company hopes to keep up with changing times to deliver what its customers want.
How Restoration Hardware expects to move forward
In particular, Restoration Hardware will work even harder to build momentum. Between its redesigned Source Books that will go out in the fall, the introduction of the RH Modern concept across the store network, and a new investment in the RH Interior Design business, Restoration Hardware thinks that it can capitalize on lucrative opportunities, and find new avenues for growth. Those moves will take time to develop, but the company has high hopes that it will pay off.
Investors will also like the fact that Restoration Hardware kept its guidance intact. The retailer still expects adjusted earnings of $1.60 to $1.80 per share, with sales growth of 1% to 3%. Fiscal third-quarter revenue of $520 million to $530 million and quarterly earnings of $0.13 to $0.18 per share might be less than investors had wanted to see, but they reflect the near-term challenges that the company set forth.
As a result, Restoration Hardware shares climbed dramatically in response to the news, posting gains of more than 10% in after-hours trading following the announcement. With many investors setting their expectations so low for the retailer, Restoration Hardware's progress thus far has put it ahead of schedule in many people's eyes. That could bode well for its prospects going forward into the holiday shopping season.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Restoration Hardware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.