Restoration Hardware Implodes After Terrible Guidance, Bizarre Disclosures

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.

This post originally appeared on Zero Hedge

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