Does a Weak Holiday Report Really Matter?
Restoration Hardware is trading at six-month lows after being one of the only retail companies not to release holiday sales or attend ICR XChange, thus giving the illusion that it's trying to keep quiet. And while its holiday sales might very well be poor, the bottom line is that growth plus cheap valuation eventually equals large gains.
What's wrong with retail?
If you look throughout retail, it would be almost impossible to find any signs of strength during the holiday season, especially for specialty retailers.
A common theme is that retailers tried vigorously to protect market share via heavy discounting. However, when sales volume is only modestly higher, and discounting is significantly more meaningful, lower revenue and margins are the result. A perfect example is Best Buy; just listen to the company's conference call.
Best Buy reported that comparable-store sales fell 0.8% and repeatedly cited its guaranteed-low-prices promise to consumers as leaving it in a bad fundamental situation. The stock is now trading lower by 30%, showing the impact that poor holiday sales have on investor sentiment.
Why might Restoration be different?
One reason Restoration Hardware is trading at six-month lows is because investors are assuming that it will perform like most other retailers in the nation.
However, it is important to note the fundamental difference between companies like Restoration, Best Buy, and J.C. Penney. Best Buy sells products that are commonly purchased during the holiday season, like tablets, computers, video games, and TVs. Restoration is a high-end home-improvement store, and I don't know about you, but I don't know many people who remodel their homes during the holiday season.
Moreover, high-end retail is typically not as vulnerable to pricing pressure as companies like Best Buy. While high-end retailers Michael Kors and Macy's did partake in some promotional pricing, it wasn't to the same degree as consumer retail or electronic retailers.
With that said, we really are comparing apples to oranges, because as previously mentioned, Restoration is not selling tablets, purses, shirts, or automobiles, but rather kitchens, patios, and bedroom decor.
Hence, it's a tall order to see weakness in retail and draw a connection to Restoration.
Do weak holiday sales really matter?
Now let's play devil's advocate, and say that Restoration reports earnings in March, doesn't update its outlook in the next few weeks, and the results are below expectations. Given the company's growth and what's expected combined with its valuation, does it really matter to long-term shareholders if Restoration is a little shy on beating the consensus? And isn't this fear already priced into the stock?
Restoration Hardware is coming off a year in which it's expected to grow revenue by 32.2% year over year. And if we look ahead to 2014, Restoration is expected to grow sales by another 21%. But what's most impressive is that Restoration has achieved all of this growth via same-store sales!
Restoration has not increased the number of its stores but rather added a section to its catalog, and its high-end customers came flocking. Moreover, Restoration Hardware has been talking since the first quarter of last year about expanding its stores. Hence, could this be the year that we see more stores, and if so, shouldn't we expect accelerated growth?
With that said, Restoration Hardware's growth is light years ahead of its peers. Take a look at the chart below, which shows full-year growth in 2013 and expected growth for this current year among Restoration's peers.
2014 Expected Growth
Home Depot and Lowe's are the juggernauts within the home-improvement space, and you can see a clear growth correlation between these two companies of similar size. Combined, Home Depot and Lowe's operate thousands of stores and employ hundreds of thousands of people. Given their growth, you can see that this is an industry as a whole that is growing at a faster rate than the economy and also faster than retail as a sector.
Then, we have Lumber Liquidators and Restoration Hardware, two companies with comparable fundamentals but disconnected growth. Restoration is about 70% larger than Lumber Liquidators and is clearly growing faster. Moreover, Lumber Liquidators focuses solely on the niche market of hardwood floors, while Restoration targets a much larger high-end home-improvement space. Yet, despite these strengths in favor of Restoration, it also has a lower valuation.
Lumber Liquidators' market capitalization is $2.7 billion; Restoration's is $2.2 billion. Once more, Restoration is larger, faster-growing, and has more upside potential of the two. Yet Restoration trades at just 1.5 times sales compared to Lumber Liquidators' 2.9 times sales multiple. In fact, Restoration trades at a near identical multiple to Home Depot, and as most investors know, growth is almost always rewarded with higher premiums.
The bottom line is that regardless of whether Restoration announces holiday sales that are disappointing, the stock is already priced for a worst-case scenario. When you stop and consider the growth, it's really strange that Restoration is priced so cheaply.
Not to mention, Restoration became a public company in 2012, and since then it has beat earnings expectations on every single quarterly announcement. Therefore, the odds are in Restoration's favor to perform well when it reports holiday numbers -- but if not, investors have to find comfort in the saying, "If a business does well, its stock usually follows." Because in this case, Restoration is doing very well and is priced for gains.
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The article Does a Weak Holiday Report Really Matter? originally appeared on Fool.com.Fool contributor Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lumber Liquidators, and Michael Kors Holdings. 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.
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