Restoration Hardware (NYSE: RH ) reported earnings recently and its revenue growth showed a significant deceleration in comparison to what investors have come to expect. Nonetheless, for investors with a long-term outlook, Restoration Hardware has a plan in place to keep growth robust, thus allowing for long-term stock gains.
Its past growth is undeniable
Restoration Hardware is luxury to the core, vintage yet modern timeless designs, selling home improvement furniture and goods created by hundreds of small and medium-sized vendors who sell specifically to Restoration Hardware.
Albeit, Restoration Hardware's stock traded lower on Thursday after quarterly earnings revealed that revenue growth decelerated from prior quarters. In the second quarter, comparable sales increased just 13% year over year, which represents a significant slow-down from what investors are used to seeing, such as 20% to 30% comparable growth over the last two years. Nonetheless, when compared to other home improvement retailers, Restoration Hardware's growth is undeniable.
To explain, Restoration Hardware's most recent quarter's comparable sales growth can be seen below, compared to home improvement competitors Lumber Liquidators (NYSE: LL ) , Home Depot (NYSE: HD ) , and Lowe's Companies (NYSE: LOW ) . In addition to the single-quarter performance, the same period for the previous two years is also included, further illustrating the degree of growth for Restoration Hardware long term.
| Q2/2014 | 13% | (7.1%) | 4.4 % | 5.8 % |
| Q2/2013 | 30% | 14.9% | 9.6 % | 10.7 % |
| Q2/2012 | 31% | 12.4% | (0.4 %) | 2.1% |
Understanding comparable versus overall sales growth
It's important to understand the difference between comparable sales and revenue growth to get an idea of just how well Restoration Hardware has performed.
As for overall revenue growth, it is the difference in revenue from one year to the next. However, comparable sales growth only tracks stores that have been operational longer than 12 months. Then, revenue from those stores are compared to the same period in the year prior. The difference, whether it be gains or losses, is what creates comparable sales. In other words, if a company has higher comparable sales year over year, then customers are spending more money, or the company is attracting new customers into those existing stores.
Thus, Restoration Hardware's comparable stores increased 13% during the second quarter on top of 30% growth in 2013, which was then on top of 31% growth in 2012. That's impressive!
Restoration Hardware's growth is here to stay
With that said, 20% to 30% comparable sales growth might very well be a thing of the past for Restoration Hardware, given its 12% increase during the last quarter. However, investors should keep in mind that the opportunity for overall revenue growth is still very much present. Notably, during the company's impressive growth years, it has not expanded its total number of stores. Its store count has stayed right around 70.
Therefore, Restoration Hardware is yet to earn new revenue by increasing its store count. Instead, Restoration Hardware has renovated, closed, and reopened some of its key locations, testing a new concept of megastores that it calls Full Line Design Gallerias.
Last year, Restoration Hardware renovated its New York Gallery, taking its square footage from 10,000 to 30,000. It also replaced the Boston store after renovating the old New England Museum of Natural History, which is now a 40,000 square foot Gallery.
But, after two years of renovating, Restoration Hardware is finally expanding, which was reported following its fiscal 2013 earnings. Back in March, the company's CEO Gary Freidman said, "we will open new Galleries in Greenwich [Conn.], Los Angeles, and our first next generation Full Line Design Gallery in Atlanta." He also added that Restoration Hardware had signed five additional leases for Full-Line Design Galleries and was negotiating for another 25 locations.
After the company's most recent quarter, Friedman said that the Atlanta and Los Angeles galleries will soon open, that it has signed three additional leases, now eight total, and that the company is now negotiating for 30 additional locations, up from 25.
Therefore, Restoration Hardware will increase its total store count by 50% over the next few years, all of which will be Full-Line concepts that are built to look like a showroom of the company's best products. In other words, Restoration Hardware's comparable-sales growth may be slowing after three years of explosive performance, but it should get a boost from significantly expanding its square footage via additional galleries in new markets. Hence, Restoration Hardware's growth days are far from over.
Foolish thoughts
Restoration Hardware finished its fiscal 2014 year with revenue of $1.5 billion and an operating margin of 3.5%. According to Freidman, once the company's expansion program is complete, and all Galleries reach their full potential, Restoration Hardware will become a company with $4 to $5 billion in North American sales and an operating margin in the mid-teens.
Then Restoration Hardware might eventually expand internationally. Therefore, given its long-term growth outlook, and its opportunity to become even more noticeable through expansion in the luxury home improvement space, Restoration Hardware remains a solid investment opportunity whose growth is here to stay.
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