Restoration Hardware Hits Another Snag in Its Recovery Plans

Image source: Restoration Hardware.

Competitive conditions in the retail industry have hurt a wide variety of companies, but home furnishings specialist Restoration Hardware has been among the hardest hit. The company's focus on higher-end products has left it vulnerable to sluggishness on the luxury side of the retail market. Coming into Wednesday's fiscal first-quarter financial report, Restoration Hardware investors didn't have high expectations for what is typically a slow quarter. But they were still surprised by the fact that Restoration Hardware lost money for the quarter, and its discussion of future guidance raised new concerns about the retailer's ability to execute a full turnaround. Let's look more closely at what Restoration Hardware said about its quarter and what lies ahead for the company going forward.

Restoration Hardware sees red

Restoration Hardware's first-quarter results showed just how much difficulty the retailer has had lately. Revenue rose 8% to $455.5 million, which was roughly in line with what most investors had expected to see from the company. However, Restoration Hardware posted a small adjusted loss of $2.1 million for the quarter, reversing a modest profit in the year-ago quarter. That worked out to a loss of $0.05 per share, which was a dime less than the nickel-per-share profit in the consensus forecast among those following the stock.

A closer look at the numbers shows in more detail some of the adversity that Restoration Hardware is going through. Comparable brand revenue was up just 4% during the quarter, slowing from the 15% pace that the retailer enjoyed in the year-ago period. Restoration Hardware's stores did fairly well, seeing a 19% rise in revenue. But the retailer's direct sales channel underperformed, with sales actually falling 4% in a trend that shows a troubling failure to capitalize on opportunities for e-commerce-related growth.

Moreover, some of the problems that Restoration Hardware has described in past quarters continued during the first quarter. Once again, the company cited adverse conditions in the energy and currency markets as affecting its business, adding to what it referred to as a "general slowdown in the luxury consumer market." The new RH Modern line continued to raise concerns, and the company said that production delays have produced new costs. Combined with investments designed to give customers a better shopping experience, moves to optimize inventory, and the decision to introduce the RH Grey Card membership model, Restoration Hardware said that it would see considerable downward pressure on full-year fiscal 2016 earnings.

CEO Gary Friedman still tried to cast the difficulties in a positive light. "Despite our recent difficulties," Friedman said, "we remain the leading luxury home brand in the world." The CEO also believes that next-generation Design Gallery stores and the expansion of product offerings under the RH Modern concept will drive the company toward its goal of $4 billion to $5 billion in annual revenue in North America.

What's ahead for Restoration Hardware?

The problem for investors, though, is that Restoration Hardware's timeline for fully realizing its potential keeps getting pushed further into the future. The retailer said that because of all the negative factors affecting its business right now, it expects a negative hit of between $0.90 and $1 per share to its fiscal 2016 adjusted earnings.

Overall, Restoration Hardware's guidance left much to be desired. For the fiscal second quarter, Restoration Hardware expects revenue of between $505 million and $520 million, which was less than the roughly $530 million consensus forecast among investors. Adjusted earnings of $0.28 to $0.33 per share is far less than the $0.80 per share that investors expect, and it's only partially explained by the $0.30 per share headwind related to short-term operational costs that the retailer mentioned.

Full-year guidance was similarly disappointing. Net revenue growth will come in between 1% and 3%, which is a further downgrade from the low- to mid-single digit percentage gains that Restoration Hardware predicted last quarter. Adjusted earnings of $1.60 to $1.80 per share would represent a decline of at least a third from prior-year figures, far underperforming the current consensus forecast for $2.66 per share in earnings.

In light of the bad news, Restoration Hardware shares plunged, falling more than 20% before the stock market opened on Thursday morning. Unless the company can start showing near-term success, it will be hard for Restoration Hardware to reassure investors that it remains on track for a longer-term turnaround.

The article Restoration Hardware Hits Another Snag in Its Recovery Plans originally appeared on Fool.com.

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.

Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.