Restoration Hardware Implodes After Terrible Guidance, Bizarre Disclosures

Tyler Durden's picture

Restoration Hardware almost made it two full quarters without imploding. Alas, it was not meant to be.

After reporting abysmal numbers in Q3 2016, Q1 2016, Q4 2015 - when the company went so far to blame its own crashing stock price for poor earnings - RH stock more than doubled after its better than expected Q4 2016 numbers as long-suffering investors (not to mentioned squeezed shorts) assumed that that was finally it: that the company has finally turned the corner.

Alas, it was not meant to be, and moments ago the volatile retailer reported non-GAA{ Q1 EPS and revenue of 5 cents and $562.1MM respectively (GAAP loss was $0.09) in line with what the company had previously guided.

However it was once again the company's disturbing guidance that surprised investors, as the company slashed not only its Q2 byt also Full Year earnings far beyond what could be considered a simple revision.

Specifically, while RH sees Q2 net revenue of $595m to $610m, better than the estimated $581.26MM, the problem was Q2 earnings, which the company sees in the range of 0.38c to 0.43c, wildly missing estimates of 64.48c, and coming even below the lowest estimate in the range of 53c to 75c).

Furthermore, while RH sees full year revenues in line, at $2.4-$2.45, above the est. of $2.41, once again EPS surprised, as it is now expected to print in the range $1.67-$1.94, far below the consensus estimate  $2.17, and below the low end of the range of $2.05 to $2.33.

What prompted the sharp revision: the company's announcement that it plans to shift to building cash flows, which means "reducing our new Gallery opening cadence... which is expected to drive high-quality sustainable growth, while lower capital requirements." In other words, the company is admitting it seeks a slower growth rate.

Not only that, but in a piece of truly bizarre disclosure in the earnings release, the company CEO Gary Friedman said the following:

We 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; expanding our Source Book mailings while many are eliminating catalogs; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; 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 strategies being pursued by many in our industry.

Judging by the stock reaction, the market would rather stick with conventional wisdom. And then there was this, taken right out of an ISIS pitchbook:

Yet, our 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. A team that is driven by our values and beliefs. A team that is willing to march into hell, as we did last year, for a heavenly cause.

Here is the full excerpt from the Q1 earnings announcement.

For fiscal 2017, we are increasing our revenue guidance to a range of $2.4 billion to $2.45 billion, reflecting a more aggressive approach to rationalizing our product offer, reducing inventories, and increasing free cash flow. While this approach will benefit revenues and cash flow for the year, it will have a negative impact on earnings. As a result, we are lowering our adjusted net income guidance from a range of $65 million to $80 million, to a range of $60 million to $70 million, which would translate to adjusted diluted earnings per share in a range of $1.67 to $1.94, assuming a weighted average diluted share count of 36.0 million.

 

As previously discussed, we believe there is an opportunity to improve returns by having a more disciplined approach to capital allocation. Accordingly, we plan to reduce our new Gallery opening cadence to a range of 3 to 5 per year, which is expected to drive high-quality sustainable growth, while lowering capital requirements and execution risk over the course of our real estate transformation. In fiscal 2017, we expect to open 3 next generation Design Galleries, all with integrated food and beverage. We remain confident in reaching our long-term goal of $4 to $5 billion in North American revenues, industry-leading operating margins, and significant free cash flow and returns on invested capital.

 

We 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; expanding our Source Book mailings while many are eliminating catalogs; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; 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 strategies being pursued by many in our industry.

 

We believe when you step back and consider we are - one, building a brand with no peer; two, creating a customer experience that cannot be replicated online; and three, have total control of our content from concept to customer - you realize what we are building is extremely rare in contrast to today's retail landscape. Yet, our 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. A team that is driven by our values and beliefs. A team that is willing to march into hell, as we did last year, for a heavenly cause. A team that has a bold vision for the future, and an organization that is demonstrating it can bring that vision to life.

 

Carpe Diem,

 

Gary

Gary Friedman
Chairman and Chief Executive Officer

Alas, the only thing the market has carped is the sell button, and the stock is crashing once again after hours.

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Banana Republican's picture

Just because you believe in UFOs and unicorns, it doesn't make you a leader.

Antifaschistische's picture

"Yet, our most valuable asset is not what we've done, but rather who we've become"

Yes, one more retailer selling cheap crap from across the ocean is what you've become.   Thanks for that.

813kml's picture

The eloquent words of a CEO that just strapped on his golden parachute.

JRobby's picture

More over priced shit that no one can buy anymore in a style that no one wants anymore

Offthebeach's picture

It's all tomorrows shag carpet.

lincolnsteffens's picture

A hardware company I had done a little business with over a 30 year period with some similar products just suddenly shut its doors a few days after I had placed an order for hinges and door plates never came. Many of their products were high quality and pricec less than many competitors. The company had been in the same family for 44 years but the last 4 years saw a steep down trend. It was started about 100 years ago.

Sad because I am one of those Luddites that restores early furniture and old buildings. The furniture sales have declined so low that this may be my last year.

Economic recovery my ass! You are partly correct that not many people care about early styles anymore and feel totally unconnected to history. Even reading a book is so out of style I can't sell a reference book or an old novel anymore. Just wheel me over to the Grand Canyon and release the brake. Lots of business are going the way of the buggy whip.

rf80412's picture

If only it was senior management who got their lives destroyed when a company goes down in flames, rather than everyone else at the company.

C-levels are commodity labor as much as anyone else.  They've got their cookie cutter policies they learned at business school in the breaks between coke parties, and their career track consists of moving from the top spot in one company to the top spot at a more famous company.

CNONC's picture

A whole lot of self congratulatory "we" in fhat statement. Soon to become an accusatory "they."

Phat Stax's picture

HA!  A P/E of 440 and levered cash flow of -$125mm.  No problem at all.  Who could have seen that coming?  

NumNutt's picture

Another flash in the pan, Poof and its gone...

E.F. Mutton's picture

Double-Secret Non-GAAP is the answer

economessed's picture

Another enterprise that imports Chinese goods, marks the price WAAAYYYYYYY up and then finds that US consumers don't have the capacity to entitle them with huge reward for narcicissm? 

Here's a tip to RH:  over 80% of the foot traffic coming into your "galleries" are opportunistic shoplifters.  15% are legitimate buyers, but can only afford used plastic lawn furniture.  The remaining 5% are going to wait for you to mark-down the cost of your products by 60% before they make a purchase.

directaction's picture

Never heard of them. 

Kprime's picture

lol, the whole time I was reading the article I was wondering when the hell they were going to tell me what "restoration hardware" did as a company.  Never heard of them either.

ali-ali-al-qomfri's picture

nothing a new over priced, member discounted, door knob can't fix.

CrankyCurmudgeon's picture

Restoration Hardware is not a flash in the pan. They have been around since the 70s, when I owned an Edwardian house.

 

That said, I gave them exactly one order because the family owned hardware store in a town full of 1890-1920 houses stocked what I needed for less than half the price.

Bryan's picture

Dang.  Now I have to find another house to leverage.

izzee's picture

The problem is, when you're weighed under with $$$hundred of thous of Student Debt, even if you buy and urban-decayed rat trap....which incedently I did in Baltimore in the late 70's- for $1, One Dollar... you will be shooping at HD or Lowes and not RH, as you restore your flipper and await the wave of Gentrification.

Worked well in Balt...helped by Rouse Co Inner Harbor, 2 count them 2 Stadiums Baseball and Football...etc etc

$1 to $450K

Got out before Martin O'Malley.

shovelhead's picture

Makes me sick to think about the 4 story  brownstone I could have bought for back taxes a stones throw from Boston Symphony Hall in the early 70's that my father said was a really good deal. Guaranteed HUD money for rehab and all. All I saw was a destroyed shooting gallery in a very dicey part of town and at 20 years old the idea of staying there for 5 years in the ghetto to qualify was a dealbreaker.

A few year ago I drove by while in town and saw a for sale sign on the second floor. I called the realtor. 1.45 mil. for the apt.

Very nice neighborhood.

I console myself by telling myself the junkies and mau maus probably would have killed me so I came out ahead.

Basaltie2017's picture

Stop sending out that giant paperweight of a catalog every year. Save quite a few million bucks and a couple of forrests.

HRH Feant2's picture

I got the whole collection of catalogs, once. 20 or 30 pounds of paper that went straight into the trash. I don't recycle.

Berspankme's picture

I use one for a doorstop on my patio door when windy

youngman's picture

I used to buy from them when I was restoring an old Victorian....I have no idea what they are now....I saw christmas lights in there once.....

rf80412's picture

They're basically steampunk now.  Distressed industrial with Victorian lashings and literally everything in either a raw linen/cotton off-white color or a cool dark brown.

zipit's picture

Don't they implode pretty much every quarter?

Dewey Cheatum and Howe's picture

really poor business model at this point in the cycle. all of retail has hit the wall, people don't have money to buy over priced shit knock-offs,from some self imposed savant. please, somebody tell the emperor he's completely naked.

Chippewa Partners's picture

Apparently Gary and Bezos don't frequent the same yacht basin..............

scoutshonor's picture

About implode, ZH you keep using that word...

gilhgvc's picture

so in other words, the crap I already sell on ebay, they sell for 3 times as much?

Peterman333's picture

yeah but when I need that odd or end piece of crap, Ebay is always the best place, try to explain this to people and they don't seem to get it, they think all crap has to be purchased from Amazon.

Able Ape's picture

Yeah, and they're going to raise the Titanic, polish her up and put her back in service....

Full Court Lugenpresse's picture

LOL at companies that actually sell real shit. They should retool their business around selling Internet Advertising, that is a limitless ocean of infinite profit

Peterman333's picture

Or if they actually sold "restoration hardware", something like that wouuld be cool, instead it was just cheap crap with a cool marketing name.

Offthebeach's picture

I junk piles of old American Standard, Delta facets.   Stuffs built like soviet tank hulls.  Throw a new valve and good for another 50 years.

Some one should start a mail order re chrome buisness.  Those old fixtures weigh a ton.

 

pankowboy's picture

Booyahh on all that. And, those toilets of old could be counted on to both flush, and not leak and destroy your house, unlike the cheap SHIT we have now.

Peterman333's picture

Those toilets when installed lasted for like 40 years or more too, had them growing up in a house built in 67, freaking things were there still on the originall seals in the early 2000's. While repairing a toilet recently I marvelled, how did that tradesman get that freakin' wax seal to last 40 f'ing years. Skilled labor and quality product.

HRH Feant2's picture

That is a good idea!

Isn't there a way to clean up old cast iron bathtubs and make them look like new? I wonder if you can do that with old porcelain sinks and toilets, too.

Squid Viscous's picture

but...Cramer said it was safe to get back in, and his new bathroom from RH is expensive but fantabulous

The Count's picture

 

RH claim to fame: Dark grey everything.

shovelhead's picture

Shareholders should take him out back and club him like a baby seal for spouting insipid tripe like that.

schrock's picture

Crazy stupid how much this stock price has risen over the last few months. Close today it was 57, after hours it's down to 44. On March 1'st the price was 30, a 30% rise since March 1'st to todays close. Trump like Oblamer has given free reign to the federal reserve and PPT to keep stocks going to the moon. Remember when Trump said “We are in a big, fat, ugly bubble.”

https://www.bloomberg.com/news/videos/2016-09-27/trump-we-are-in-a-big-f...

Westcoastliberal's picture

Management sounds to be a bit goofy, not unlike the light bulbs at Target.

adr's picture

I'm sorry but how if the fuck does this company sell $2.4 billion worth of stuff. That isn't possible. Not in a billion years. 

Me thinks the tribesman CEO and CFO is playing games with the numbers. 

Let's play the per store sales game. $2.4 billion divided by 65 stores divided by 365 = $101,159 per day per store. You think over a hundred grand walks out of those doors every single day? If that's the case those store managers should be paid $1million a year or more. Yeah, I know web and catalog.  

Let's claim the catalog and web business is 50% of revenue, kind of hard to believe, that's still $50k per day per store. Even selling $2500 chairs and $1500 steamer trunk coffee tables that is kind of ridiculous. 

Sorry Mr. Jewspeclstein, your numbers are as bogus as Michelle's vagina. 

Can we please audit these P/E to the hundreds bullshit corporations? This garbage and outright fraud has got to stop.