Shares of Restoration Hardware (RH 25.19), a company that caters to the luxury lifestyle market with its home furnishings and accessories, are up 15% in pre-market trading following the company's preliminary fourth quarter guidance.
That guidance was better than feared, which doesn't mean it was necessarily good. In fact, compared to the same period a year ago, there is scope to suggest the guidance is downright bad. However, because there was a huge short position in the stock, it was of good enough quality to spook short sellers into covering their positions.
That effort is really the basis for the outsized move in the stock this morning. Granted the guidance for net revenues and adjusted diluted earnings per share is at the high end of the company's prior guidance range, but what gets lost in that telling is the fact that the results themselves are still far below analysts' original expectations.
Recall that Restoration Hardware issued a fourth quarter warning after the close on December 8, saying its fourth quarter net revenues should be between $562 million and $592 million and adjusted diluted earnings per share should range from $0.60 to $0.70. Analysts' average expectations at the time were closer to $640 million and $1.07, respectively.
After yesterday's close, however, Restoration Hardware said its adjusted net revenues are expected to be approximately $590 million and its adjusted diluted earnings per share should be approximately $0.68.
That's certainly better than being at the low end of the guidance ranges, yet the company's struggles are borne out in the fact that its expected net revenues are 9% below the same period a year ago and its adjusted diluted earnings per share are 31% below the fourth quarter from last year. In the same vein, its adjusted gross margin of 34.6% is 100 basis points lower than last year.
Those struggles have stemmed in part from changes to the company's business model, costs related to the launch of RH Modern, increased promotional activity, and the deferred mailing of its 2016 Source Book.
Management believes Restoration Hardware is beyond the "most uncertain stage of [its] transformation," yet investors probably won't be fully convinced of that until the first quarter results are in. There is some time to wait on that, but in the meantime, RH is getting the benefit of short sellers' doubt.
At Thursday's close, RH was down 18% in 2017 and down 51% over the last 52 weeks.