Shares of Restoration Hardware roared to life on Thursday, surging as much as 40% the day after the retailer reported that second quarter revenue rose 13% to $615.3 million, handily beating Wall Street expectations, including the Zacks Consensus Estimate for $612.7 million.
Same-store brand revenues in the quarter rose 7% compared to a 3% decrease last year, direct revenues rose 14%, and store revenues rose 13% from the year-ago period, the company said, noting success in its new membership model that has been questioned by some analysts.
The company said it’s taking a "cautiously optimistic approach" to its outlook, given what Chairman and CEO Gary Friedman called "the uncertain macro environment" along with the many initiatives and investments being made. The company expects third quarter adjusted net revenues to land between $575 million and $590 million, adjusted operating margins to land between 7% and 7.6%, and adjusted net income in the quarter of $16 million to $19 million. For the fiscal year, the retailer raised its adjusted net income guidance to a range of $70 million to $77 million, on adjusted net revenues of $2.42 billion to $2.46 billion, according to a company press release.
Restoration Hardware’s optimistic guidance for the year might actually be conservative, according to Gordon Haskett analyst Chuck Grom. "Restoration Hardware continues to streamline its operations, which to date have yielded impressive results," he said in an email to Retail Dive. "[C]oupled with a 50% reduction in the float, the model now has a tremendous amount of torque that could drive significant [earnings] upside, particularly if sales come in better-than-expected.”
In his statement released Wednesday, Friedman said the retailer is moving past "the most uncertain stages of our transformation" and will continue to focus on the design changes to a more modern aesthetic that he said are already paying off and continued streamlining of its operations, among other moves. "[Last year], 2016, was also the first full year of many new business initiatives such as RH Modern, RH Teen, RH Hospitality, the redesign of our RH Interiors Source Book, the expansion of RH Interior Design Services and the addition of Waterworks to our platform," he said. "All of these investments are expected to contribute to growth in 2017 and beyond."
Restoration Hardware has been beset by inventory woes and some confusion around changes to its markdown strategy, putting in jeopardy a previously successful turnaround, based on a physical store strategy and mailings of a thick print catalog. The retailer is also betting on an upscale restaurant play in key urban areas, which prompted a lawsuit against Crate & Barrel over the hiring of executives who it alleges had knowledge of those plans and were using that in their new jobs.
But Friedman said that scrutiny of the company shouldn’t just be on what has been done in the past, and said his teams are highly driven. "[O]ur most valuable asset is not what we've done, but rather who we've become. We've become a team of people who don't know what can't be done," he said. "A team that is willing to march into hell, as we did last year, for a heavenly cause."
The emphasis on brick and mortar (and the printing of the retailer’s massive print catalog) will continue, and Friedman defended those again on Wednesday. "We do understand that many of the strategies we are pursuing—opening the largest specialty retail experiences in our industry while most are shrinking the size of their retail footprint and closing stores; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; continuing to mail inspiring Source Books, while many are eliminating catalogs, and refusing to follow the herd in self-promotion on social media platforms, instead allowing our brand to be defined by the taste, style, design and quality of the products and experiences we are creating — are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry."
The company in its fiscal 2017 is now moving on to a year of "execution, architecture, and cash," Friedman noted, as he has before. "Our efforts are focused on executing our new business model, architecting a new operating platform, and maximizing cash flow by increasing revenues and earnings, and reducing inventory and capital investments," he said. "Our goal is to break down the silos that exist in most businesses of scale, and cross functionally design a fully integrated operating platform that simplifies our business, enhances the customer experience, and amplifies decision quality and speed."