Will Rising Rates Crush Restoration Hardware Earnings?

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Restoration Hardware will release its quarterly report on Tuesday, and investors have optimistically bid up its shares lately, more than doubling in value since its IPO last fall. But with fears of a potential slowdown in the housing market, will Restoration Hardware earnings be able to follow suit and continue growing?

Restoration Hardware has had a checkered past, having been hot during the housing boom but nearly succumbing to the housing bust before private equity firm Catterton Partners won a minor bidding war against Sears Holdings to take the company private. Now, the home-furnishings retailer has rebounded by taking a different approach to the segment, focusing on more upscale products. Yet the question remains whether the company will prove vulnerable to another housing downturn if it comes. Let's take an early look at what's been happening with Restoration Hardware over the past quarter and what we're likely to see in its report.

Stats on Restoration Hardware

Analyst EPS Estimate

$0.43

Change From Year-Ago EPS

(2.3%)

Revenue Estimate

$377.6 million

Change From Year-Ago Revenue

29%

Earnings Beats in Past 4 Quarters

3*


Source: Yahoo! Finance.
*Out of three quarters since IPO.

Can Restoration Hardware earnings keep climbing?
Analysts have gotten increasingly optimistic about Restoration Hardware earnings in recent months, boosting their July quarter estimates by $0.04 per share and their full-year projections by double that amount. The stock has also made an impressive run, climbing 32% since early June.

The bulk of those gains came in the wake of the company's first-quarter earnings report, which featured extraordinary growth rates. Comparable-store sales rose at a whopping 41% rate, led in part by a 38% jump in direct-sales that now make up almost half of its overall revenue. In essence, Restoration Hardware is using its stores as a showroom for its catalog and Internet offerings, focusing on making its best items available for immediate in-store purchase rather than trying to have everything available for bricks-and-mortar shoppers. By comparison, Williams-Sonoma's Pottery Barn division, which is arguably Restoration Hardware's most comparable competitor, saw only 7.6% gains in comps despite the strong housing environment boosting overall industry prospects.

But one thing holding back Restoration Hardware's share price is the fact that private-equity investors are still looking for the exit door. In July, selling shareholders announced a secondary offering of stock. Insiders sold 8 million shares for $70 per share, with underwriters getting rights to another 1.2 million shares that led to a $644 million payday for those shareholders. The offering depressed share prices temporarily before they bounced back after the offering was complete.

Going forward, Restoration Hardware faces a couple of threats. One comes from competition, as Pottery Barn and Pier 1 Imports learn from the success that Restoration Hardware has had and refine their own offerings to respond to shoppers' wants and demands. Pier 1 has also benefited from the housing recovery, and its own mix of items tries to capture both upscale and mainstream homeowners. But perhaps more importantly, Restoration Hardware and its entire industry depend on the sustainability of the new housing boom. So far, higher rates haven't led to a slowdown in housing-market activity, but if it eventually comes, Restoration's prospects could start to get a bit dimmer.

In the Restoration Hardware earnings report, watch to see if the company can sustain its huge growth in revenue. With plans to expand into as many as 20 key new markets, the up-and-coming retailer has plenty of growth avenues left ahead of it.

Restoration Hardware's use of its stores as a showroom for its more extensive catalog is one example of smart management of the huge paradigm shift going on in the retail industry. You can read about some other innovative retailers in our special report, 3 Companies Ready to Rule Retail. Uncovering these top picks is free today; just click here to read more.

Click here to add Restoration Hardware to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Will Rising Rates Crush Restoration Hardware Earnings? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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