Is This Home Improvement Stock Ready to Rally In the Coming Months?

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In the last month, Lumber Liquidators’ (NYSE: LL) stock has outperformed Restoration Hardware (NYSE: RH) by a ratio of 5:1, as the two companies battle as the best up-and-coming home improvement retail company in the U.S. In terms of market capitalization, one-year stock performance, and growth, the two companies are near identical. However, moving forward over the next few months, I think one stock is best positioned for strong performance.

A History Of Better-Than-Expected Results

Lumber Liquidators is the largest specialty retailer of hardware flooring in North America, and at various price points. The company has benefited nicely from a recovering housing market, as well as the consumer’s desire to upgrade their home.

Lumber Liquidators has doubled over the last year, driven by six consecutive quarters of beating top and bottom line expectations. In its most recent quarter, the stock jumped 8% as comparable store sales grew 14.9% year-over-year and operating margins reached a record high at 12.9%.

Since that July 24 earnings report, Lumber Liquidators has continued to tick higher, including a new all-time high on Monday behind a “Buy” rating from Jefferies, which cites growth and upside as key catalysts. Thus, Lumber Liquidators’ earnings have added an additional leg to its long-term rally.

Growing Without Expanding

Restoration Hardware operates the old-fashioned way, through catalogs, but has built a loyal following in the high-end luxury home-improvement space. The company hasn’t added new stores in the last year, but is eying several large markets for expansion. Moreover, the boom in real estate has boded well for the company, as Restoration is becoming somewhat of a trendy store for the wealthy.

Restoration Hardware became a public company in November 2012. Yet all of its earnings reports since its IPO have been significant top and bottom line beats. Most notably, in June the company’s comparable store sales grew 41% year-over-year, which is significantly higher than Lumber Liquidators’ July quarter.

Now, investors await next month for the company’s Q2 report. Restoration Hardware is trading considerably higher than it was back in June. However, since reaching all-time highs in early July, the stock has declined more than 10%. This lagging performance is what makes Restoration Hardware very attractive in the coming weeks, especially with earnings around the corner.

A Solid Year Ahead

The comparable store growth of both Lumber Liquidators and Restoration Hardware makes either company very attractive. Not to mention neither are expensive in regards to typical growth companies in the market. Take a look at a few key metrics for each company below, and keep in mind that each metric is based on 2013’s full-year guidance or analyst expectations.

<table> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Lumber Liquidators</strong></p> </th><th> <p><strong>Restoration Hardware</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>2013 Revenue</p> </td> <td> <p>$951 million</p> </td> <td> <p>$1.49 billion</p> </td> </tr> <tr> <td> <p>Price/2013 Sales</p> </td> <td> <p>2.80</p> </td> <td> <p>1.80</p> </td> </tr> <tr> <td> <p>2013 Revenue Growth (year-over-year)</p> </td> <td> <p>17%</p> </td> <td> <p>25%</p> </td> </tr> <tr> <td> <p>2013 Comparable Store Growth (year-over-year)</p> </td> <td> <p>High single – low double digits*</p> </td> <td> <p>25%</p> </td> </tr> </tbody> </table>

*guidance on last quarter’s conference call

After taking a minute to read and comprehend each metric, I think there is an even better case for Restoration Hardware to trade higher in the near future. Restoration Hardware is cheaper than Lumber Liquidators on a price/sales basis; Restoration Hardware is expected to grow sales faster; and Restoration’s comp growth is significantly higher.

Final Thoughts

If I had to pick one of these stocks for my portfolio, it would be Restoration Hardware for the reasons noted above. Lumber Liquidators is a great company with rapid growth that has a lot of positive momentum, but Restoration Hardware is the cheaper stock with the catalyst of earnings in the near future.

Looking ahead, this is a space that investors should monitor closely. Since January 2012, The Home Depot (NYSE: HD) has been one of the best performing Dow Jones components with gains of 90%. However, The Home Depot’s growth is slightly better than GDP – at 3% year-over-year – and at 1.5 times sales, I think both Lumber Liquidators and Restoration Hardware are much better options.

At 1.8 times 2013’s guided sales, Restoration Hardware isn’t too much more expensive than Home Depot. Yet Restoration Hardware and Lumber Liquidators are growing several times faster than Home Depot. Simply put, there is a lot more room for a smaller company to grow versus a juggernaut such as Home Depot, a company that relies on strong economic performance.

With that said, Restoration Hardware has proven that it can produce Foolish growth without expanding, as high-end consumers flock to the store. Therefore, with Restoration Hardware bolstering its catalog of offerings, it should thrive beyond Lumber Liquidators, a company that works exclusively in the flooring space. Ultimately, Restoration’s flexibility in product offerings is what makes it attractive long-term, as the company continues to stand alone in the space, and with exceptional growth. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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