This Home Furnishing Company is Too Hot to Touch

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Restoration Hardware Holdings (NYSE: RH) has advanced significantly since the middle of April, from around $33 per share to nearly $72 per share, a whopping gain of early 120% within just two months. Does Restoration Hardware have more room to run upward? Should we buy the company at its current trading price? Let’s take a closer look and find out.

Recent significant growth

Restoration Hardware is a home furnishing seller that offers various types of merchandise including furniture, bath ware, décor, garden, etc. As of Feb 2013, the company operated around 71 retail stores and 13 outlet stores in the U.S. and Canada. Restoration Hardware derived most of its revenue from the furniture category, $628 million, accounting for 52.6% of the total 2012 revenue. It has quite a diverse customer base, as no single customer has represented more than 10% of its total revenue in the past three years.

In the first quarter 2013, Restoration Hardware reported an impressive quarterly operating performance. While its revenue jumped more than 38% to $301.3 million, its net loss has been narrowed down, from a loss of $3.7 million in the first quarter last year to a loss of only $161,000 this year. The market might be impressed with its huge increase in its comparable store sales, of as high as 41%. Carlos Alberni, the company’s CEO, felt excited about the company’s first quarter performance. He said

We are extremely pleased with our first quarter performance and financial results. During the period, we delivered an increase in net revenues of 38%, comp store sales growth of 41%, and a significant improvement in profitability as we continued to invest in our infrastructure and new businesses to support our growth.

Looking forward, the company is excited for the launch of its two new businesses, RH Kitchen and Tableware and RH Antiquities. While the RH Kitchen and Tableware business could allow the company to offer a curated collection of kitchen, lighting and cookware for its customers, the RH Antiquities could get the company to tap into a $25 billion, highly-fragmented antiques collection market. Restoration Hardware expected to grow its revenue by 23%-27%, and the adjusted EPS might come in at $1.41 to $1.47.

Expensively valued compared to its bigger peers

Restoration Hardware seems to be too hot to touch with its extremely high valuation. At $68.30 per share, Restoration Hardware is worth around $2.6 billion on the market. The market values the company at as high as 51.7 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Compared to its peers Macy’s (NYSE: M) and Williams-Sonoma (NYSE: WSM), Restoration Hardware is extremely expensive.

Macy’s is trading at around $48.80 per share, with a total market cap of $18.70 billion. The market values Macy’s at only 6.3 times its trailing EBITDA. In the first quarter of 2013, Macy’s delivered good growth in its operating performance. The net income increased 20% to $217 million, but EPS had a higher growth of more than 30.2% to $0.56 per share. The higher growth in EPS was due to the company’s share buybacks. In the near future, under Terry Lundgren’s leadership, Macy’s will keep pursing “myriad new growth opportunities” within its M.O.M strategies (My Macy’s, Omnichannel and Magic Selling).

William-Sonoma, at $56.20 per share, is worth more than $5.5 billion on the market. The company has a higher valuation than Macy’s, at 9.1 times its trailing EBITDA. William-Sonoma is the multi-channel specialty retailer, operating 560 stores in 44 states, Puerto Rico and 21 stores in Canada under several brands including William-Sonoma, Pottery Barn, Rejuvenation and West Elm. The first quarter 2013 was considered the best first quarter in the company’s history, beating the estimates for both operating margin and diluted EPS. Its net revenue experienced a year-over-year growth of 8.6% to $888 million, while the diluted EPS jumped as high as 33% to $0.40. Because of the impressive first quarter results, the company confidently raised its full year guidance. While the revenue was estimated to stay in the range of $4.22 billion to $4.30 billion, its non-GAAP EPS might reach $2.67-$2.77 per share.

Among the three companies, William-Sonoma offers shareholders the juiciest dividend yield at 2.2%. Macy’s ranked second with a bit lower dividend yield at 2.1%. However, Macy’s seems to be more conservative with its dividend policy, with the lower payout ratio at 24%. The payout ratio of William-Sonoma is higher, at 37%. Restoration Hardware does not pay any dividends.

My Foolish take

Investors might be bearish on Restoration Hardware's huge insider sales. On May 20, Chairman Emeritus Gary Friedman sold nearly $40 million worth of shares in the company. Its CEO followed the Chairman Emeritus, selling nearly $16.5 million worth of shares. So did the COO and the CFO. Consequently, despite the current high growth, I do not think Restoration Hardware is a good buy at its current trading price due to extremely high valuation, no dividend payment, and significant insider sales. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Williams-Sonoma. 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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