Restoration Hardware (RH 57.25), a company that caters to the luxury lifestyle market with its home furnishings and accessories, reported its fiscal first quarter results after Thursday's close. They were -in-line with the company's pre-announcement on May 11. The big problem for RH shares this morning is that the company's earnings guidance for fiscal 2017 was way out of line with analysts' average expectation.
All things considered, the first quarter was a pretty good quarter for Restoration Hardware. Revenues rose 23.4% to $562.1 million, comparable brand revenues increased 9% on top of a 4% increase last year, and the company reported adjusted diluted earnings per share of $0.05 compared to a loss of $0.05 per share in the same period a a year ago.
The press release contained a nicely-written overview by the CEO of the strategic changes that have taken place, and continue to take place, at Restoration Hardware. Investors, however, haven't gotten caught up in the copious exposition on business developments. The only part of the letter that seemed to resonate was the earnings guidance for fiscal 2017, which was decidedly disappointing.
The interesting aspect of the fiscal 2017 earnings warning is that it was made despite Restoration Hardware increasing its revenue guidance to a range of $2.40 billion to $2.45 billion from approximately $2.30 billion to $2.40 billion. It did so saying the new revenue guidance range reflects a more aggressive approach to rationalizing its product offer, reducing inventories, and increasing cash flow.
That approach, however, will come at a cost to its bottom line.
Specifically, Restoration Hardware now expects adjusted net income for fiscal 2017 to be in the range of $60 million to $0.70 million, versus its prior guidance of $65 million to $80 million. That translates to adjusted diluted earnings per share in the range of $1.67 to $1.94, the high end of which is approximately 11% below analysts' average expectation.
This new earnings guidance is particularly disappointing since it comes roughly three weeks after the company said it was looking forward to fiscal 2017 as it expects sales growth to continue and operating margins to expand. The perception among investors is that Restoration Hardware should have had a better sense of the fiscal 2017 earnings outlook on May 11 than has now been communicated, so some credibility issues are in play.
The CEO signed his letter "Carpe Diem." Well, investors are indeed seizing something but it isn't the day. Feeling misled in a certain respect, they are seizing the stock.
Shares of RH, which have soared 86% this year, are down 20% in pre-market action.