Daily Trouble |
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<DAILY TROUBLE>
Tuesday, May 11, 1999
Restoration Hardware
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSTO)") else Response.Write("(Nasdaq: RSTO)") end if %>
Website:
www.restorationhardware.com
Phone:
415-924-1005
Price
(5/10/99): $13 5/8
HOW DID IT FIND TROUBLE?
Restoration Hardware has gone down for some serious refurbishment. Sanded down but still splinter-prone, the upscale home furnishings retailer is working off some of last year's initial public offering euphoria -- and inventory, too.
As is the case with most spring cleanings, you can always trace things back to last summer's accumulation. Restoration Hardware's June IPO came complete with seasonal fireworks. With 3.3 million shares offered at $19 a pop, the stock was bid up to $26 1/4 on opening day. A month later the stock was trading in the high $30s.
While the shares would back those gains, and then some, as the market as a whole corrected, Restoration hammered out new gains heading into the new year.
That is when excess inventory had to be marked down. The rare sale produced stellar sales gains, but it also produced dismal margins. The retailer, which had gone public as expansion proceeded at breakneck speed, found the going anything but smooth. Sandpaper, anyone?
BUSINESS DESCRIPTION
Take the best of Pier 1 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %>, Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>, and Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> and toss it into a blender. Hit frappe. That's what Restoration Hardware is, a chain of high-end stores that feature everything from upscale drawer pulls to home accessories.
It all started twenty years ago when company founder Stephen Gordon was refurbishing his Queen Anne Victorian home. His taxing quest to find appropriate parts inspired his one-stop solution. Eureka! He opened the first store in his home city of Eureka, California, and the chain has never looked back.
FINANCIAL FACTS
Income Statement 12-month sales: $209.4 million 12-month income: $4.9 million 12-month EPS: $0.23 Profit Margin: 2.3% Market Cap: $224.4 million Balance Sheet Cash: $8.2 million Current Assets: $84.6 million Current Liabilities: $50.2 million Long-term Debt: $0.5 million Ratios Price-to-earnings: 59.2 Price-to-sales: 1.1
HOW COULD YOU HAVE SEEN IT COMING?
An eclectic chain that stocks a fine china cabinet next to a sock monkey isn't easy to forget. Restoration Hardware had, and probably continues to have, a level of panache that develops a cult of shoppers as well as potential investors.
That is why, when the company came public last summer, it was a bullish feeding frenzy. Edgy retailers and ramped-up expansion with IPO money can excite Wall Street more than a plain vanilla mall peddler. This often inspires the offering underwriters into ambitious earnings projections. The estimates, which until last month's pessimistic outlook stood at $0.54 a share for this year and $0.83 a share for next year, are now buckling under with the simplest of hiccups.
Was perfection discounted when the company went public last year? Perhaps. Our news team hammered home the fact that the company's inventory turnover was in sync with its less troubled peers. There was no bloated, dated inventory on the balance sheet that was calling to be cleared out in clearance bin fashion -- the way, say, Gymboree <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %> did last year.
No, the cracks in this Trouble were hard to come by. All one had was a hot IPO -- and gravity waiting to happen.
WHERE TO FROM HERE ?
Restoration Hardware's peers are all over the map. Ethan Allen is on a roll. Pier 1 has been rolled over. Bombay <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBA)") else Response.Write("(NYSE: BBA)") end if %> is stuck somewhere in the middle, rocking and rolling.
Analysts had been expecting the company to report a loss for the fiscal first quarter, which ended earlier this month. However, they were looking for the company to lose just a third of the $0.14 to $0.18 a share deficit that the company now expects to report. As the estimates get revised lower, it is comforting to know that this did not take place over the seasonally charged fourth quarter. That is the company's strongest quarter by far, and if this was indeed just a one-time blip, the company should be back in favor within the year.
But will the paint take longer to dry? The cockroach theory states that where there is one pesky roach there may be others. Some investors will prefer to stay away rather than risk another letdown. That might cap any kind of rally the shares may have in the near term. Then again, perfection was discounted before and maybe now it's the cockroaches that are being discounted.
If that's the case, then Restoration Hardware might be a profitable venture for investors as the company refurbishes itself.
-- Rick Aristotle Munarriz ([email protected])
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