Should Investors Give Up on Restoration Hardware?
What a gut-wrenching rollercoaster ride the last six months have been for high-end home furnishing play Restoration Hardware Holdings Inc (NYSE:RH). After a meteoric rise to $106.49 per share in November 2015, the downside slide in RH stock has even been frightening. But while the move of RH stock to more than $100.00 was excessive, the rush to the exits for shareholders has also been overdone.
Some of you have probably shopped at Restoration Hardware, which is characterized by its unique and expensive home furnishings and accessories that you would expect to see in a house in the Hamptons.
Not everything is out of reach for the majority of shoppers; I was able to pick up some unique kitchen cabinetry handles and lighting without blowing my budget. The problem, however, is that the majority of bigger items, such as sofas, beds, and tables, are certainly all on the higher end. For the price of a sofa at Restoration Hardware, you could probably furnish your entire home with offerings from Swedish home furnishing leader IKEA.
Luxury retailers like Restoration Hardware have a loyal following of shoppers, but they need to get through slower periods, such as what we’re currently experiencing, when the rich are also holding back.
RH stock plunged 20% last Thursday after reporting a first-quarter earnings shortfall on both its top and bottom lines, despite an eight-percent year-over-year jump in revenue.
The company’s $0.10 per share earnings-per-share (EPS) miss was its second straight quarterly miss, while the key comparable brand revenue metric rose only four percent versus 15% in the same year-earlier period.
Now, you can fault Restoration Hardware for its shortfalls, but the massive decline in its share value is excessive, especially since the company will likely be able to stabilize things.
Restoration Hardware had been delivering some strong results prior to this bomb. Revenue increased from $1.55 billion in FY14 to $1.86 billion in FY15 and $2.11 billion in FY16. The growth is estimated to continue for the next two fiscal years, albeit at a slower rate.
The risk is that a spending drop will hurt the company’s ability and time to turn things around.
Tailwinds Behind RH Stock
Yet at the stock’s current price of less than $30.00 per share, there is plenty of bad news discounted in. Any positive development for the company would be positive for RH stock.
At the moment, there are two factors supporting RH stock:
- The stock was added to the S&P MidCap 400 index in April. That will help add some buying support from institutional investors and indexes that track this index.
- Second, watch for some heavy short selling with 7.53 million shorted shares, or 27.37% of the float as of May 13. If RH stock can rally from its technically oversold condition, we would likely see a rush of short sellers to cover their positions and offer support.
Restoration Hardware is not for the faint-hearted. You will require some courage here.
Chart courtesy of www.StockCharts.com
At the moment, RH stock is so negative that you can pick up call options on the pick for cheap premiums. For instance, the RH $20.00 call expiring in January 2017 can be had for $10.40, as of the time of writing. This means a breakeven of $30.40 per share, or about a five-percent upside move from the prevailing price. That move doesn’t seem all that difficult, unless market sentiment and the economy turn lower. (Note that this is not a recommendation to buy, but simply an example of what’s out there for interested investors.)