Bulls Are Loose in This Home Goods Shop

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What's so special about Restoration Hardware that its stock has run over 100% in its first year debut? Wall Street is overall bullish on the home-furnishings sector  based on a a housing recovery seeing Restoration Hardware, La-Z-Boy , and Pier 1 Imports up over the last year.

LZB Total Return Price Chart

La-Z-Boy total return price data by YCharts

The high-end design center chain with fixtures, furniture, lighting, and china, etc. operates  84 stores including 14 outlets in the US. Should Restoration Hardware be worth twice La-Z-Boy's market cap of $1.2 billion? It trades at 34 times forward earnings with net revenue growth reported of 30% in the second quarter, following 14 straight double-digit quarters of growth.

What's driving this growth?
It's the trendy high-end place to shop for home furnishings and getting trendier expanding into antiques and an expanded kitchen department.

Their five full-line design galleries and their 45,000 square-foot stores are doing very well with 65% better return than expected. The Scottsdale AZ gallery earns $1300 per square foot alone.

The company raised guidance to 35%-39% net revenue growth year over year for the third quarter based on the strength of the galleries, their business trends, cost savings, and digital outperformance.

Dilution of focus
Gary Friedman,co-CEO, said, "We believe we can curate a world far beyond the four walls of the home," and announced the company will be offering contemporary art, a music platform, and RH Atelier brand of luxury apparel and accessories. They will be moving outside the home, getting into the hospitality game with a NYC boutique hotel in 2015.


With all these new offerings analysts and investors may have concern over dilution of focus. It concerned the analyst from Goldman Sachs enough to ask about the integration of these new verticals: music, art, and hotels.

Mall operators have approached the company with anchor positions in tier-one malls (over 30 deals in talks). Along with a foray into apparel the company may become a new form of department store. If they can execute this high risk-high reward strategy, it could be transformative.


Industry competitors
Pier 1 , the North American importer and specialty retailer of home furnishings and decorative gifts, doesn't attract the high-end spender like Restoration Hardware and recently reported disappointing a second quarter.Pier 1 is not as digitally integrated as Restoration Hardware, which earns 45% of sales from e-commerce although Pier 1 is aiming for 10% of sales from digital in several years.

La-Z-Boy, on the other hand, achieved a place in the top 10 most loved by analysts' stocks.The company beat analysts' expectations of $0.15 EPS of first-quarter earnings of $0.18 per share, from $4.4 million last year to $9.6 million and posted a 12.7% rise in same-store sales for its furniture galleries.

CEO Kurt Darrow explained their four-four-five strategy for the furniture galleries: 400 stores, earning $400 million annually, within five years. These will compete against Restoration Hardware as the company updates its image as "the old man's recliner" company. Darrow added the company, "... continues to introduce more contemporary and transitional furniture to appeal to a younger consumer."

The Foolish takeaway
Restoration Hardware has been executing very well justifying its breakout but investors should keep an eye on these new initiatives and anchor deals. It wouldn't hurt to keep an eye on La-Z-Boy as it executes its own growth strategy.

No Pitch

The article Bulls Are Loose in This Home Goods Shop originally appeared on Fool.com.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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