Cowen's Restoration Hardware (RH) Earnings Preview

Cowen analyst, Oliver Chen, believes investors are grappling to understand certain factors impacting Restoration Hardware's (NYSE: RH) business and the uncertainty is an overhang for the stock. RH is down roughly -56% since its 3Q15 EPS report on 12/10 (vs. XRT +6%) and has declined about -24% since it preannounced 4Q15 results on 2/24 (vs. XRT +7%). No change to Market Perform rating or $47 PT.

Supply Chain Problems: RH cited that demand for RH Modern product was outstanding in its 4Q pre-announcement. However, certain vendors were unable to ramp production to meet demand resulting in significant shipping delays. As of Feb. 24th, RH expected the majority of delayed orders to be turned to revenues in 1Q or 2Q and anticipated vendors would be substantially caught up by 1H end. Investors need a timing update on revenue recognition of RH Modern, commentary on orders thus far in 1Q16 being impacted by delays, and plans to improve the supply chain to meet higher revenue volumes as RH scales to a $4-5B business.

Demand Trends: RH partially attributed 4Q revenue weakness to a spending pull-back by the high-end consumer, most notably in January which was when S&P 500 volatility increased. Investors are looking for details on whether demand trends have improved thus far as the S&P 500 volatility improved in February and March relative to January.

New Membership Card Impact: RH launched its new $100 Grey Card membership on Mar. 13th. We await details on the potential impact to the model, most notably the gross margin line. For a $100 annual fee, members are entitled to 25% savings on RH products, 10% savings on all sales, as well as complimentary interior design services. In our view, some of the key benefits are: 1) it enhances RH's CRM database, which was a weakness previously, 2) it simplifies the customer shopping experience with always discounted prices, and 3) it could result in market share gains as the $100 annual fee threshold for 25% off seems small relative to the total basket size for furniture.

Membership Card Risks:: 1) dilutive gross margin impact from constant 25% discount, although RH previously ran promos close to this level (i.e. $100 off $500 spent or 20-25% off select categories), 2) potential loss of customers unwilling to become members, and 3) difficulty in gaining share during key selling periods (i.e. holiday events) if competitors run deeper discounts.

For an analyst ratings summary and ratings history on Restoration Hardware click here. For more ratings news on Restoration Hardware click here.

Shares of Restoration Hardware closed at $37.92 yesterday.

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