Restoration Hardware will report first-quarter (ended April) results on Wednesday, June 11, after the markets close. We believe that the company is positioned to meet or moderately exceed the consensus forecast for adjusted EPS ($0.10 according to FactSet; $0.11 according to First Call). Guidance is $0.07-$0.11. Our published estimate of $0.11 represents substantial growth from $0.06 last year in the seasonally smaller period.
Our revenue forecast of $349 million (16% growth) is slightly above the $348 million consensus and near the upper end of the $345 million-$350 million guidance. Our 16% revenue growth estimate comprises similar growth rates at retail stores and in the direct channel and reflects 13% comparable brand revenue growth (a blend of 10% retail store comps and 16% direct revenue growth).
Relative to later quarters in 2014, first-quarter reported revenue growth is expected to be held back by a tough prior-year comparison and less newness (a temporary factor) due to the consolidation of sourcebook mailings and elimination of the fall 2013 mailing. Still, we estimate that Restoration Hardware’s underlying trends remain solid and have picked up sequentially with more normalized weather since mid-March. We note the strong first-quarter growth out of Williams-Sonoma’s (WSM $68.02; Outperform) Pottery Barn brand (which also has a major direct-channel business), a still-positive overall housing market, and a relatively benign stock market.
We project a 33.9% gross margin rate, in line with consensus and up 10-15 basis points year-over-year due to higher merchandise margin. SG&A expenses are expected to be leveraged by 80 basis points. Looking to the second quarter, we view the current consensus forecasts of 13.8% comp sales and $0.61 in EPS as reasonable to conservative.
Restoration Hardware shares have traded in a range between $55 and $80 over the past year. The current valuation (P/E multiples of 30 times our 2014 EPS estimate and 25 times our 2015 EPS estimate), which is back to the valuation at the time of the November 2012 IPO, appears quite reasonable to us in light of the early stage of the company’s growth trajectory with its expanded design galleries and new merchandise collections, the company’s overall strong execution, a still-favorable housing backdrop, and the scarcity of other companies in the home furnishings category that are poised to generate strong square-footage growth.
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