Restoration Hardware woes may be more than a hiccup

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An issue that Restoration Hardware‘s management had written off as a short-term hiccup may end up having a longer-than-expected drag on its top-line.

While pre-announcing the retailer’s fiscal fourth-quarter results in February, CEO Gary Friedman blamed out-of-stock merchandise at its budding RH Modern chain as one of the key culprits behind its shortfall.

In a letter to shareholders that day, Friedman assured investors that the majority of Restoration Hardware’s written orders would translate into revenue during the first and second quarters, and that its vendors would be “substantially caught up” by the end of the first half.

Now, three weeks after Friedman’s comments, BB&T analyst Anthony Chukumba is calling into question just how severe an impact the retailer’s chronic out-of-stock conditions could have on its first-quarter results — and its long-term brand equity.

By conducting a survey on 50 RH Modern products that spanned large furniture and decorative pieces, Chukumba found that just 42 percent of the items selected were in stock, with an estimated average delivery time of nine days. However, 58 percent of the items were out of stock, with the company promising to schedule a delivery in 63 days, on average.

For one of the products, the Rivet four-drawer dresser, Restoration Hardware did not promise to contact buyers to schedule delivery until December.

“To be blunt, we find it shocking over half of RH Modern products are currently not in stock and will take over two months on average before customers are even contacted about scheduling deliveries,” Chukumba told investors.

“We are also troubled by the fact management did not anticipate the high level of RH Modern demand and ensure its supply chain was adequately prepared given its repeated bullish comments on the concept’s potential. Our RH Modern survey not only lessens our confidence in [Restoration Hardware’s first-quarter] performance, but we believe these issues will leave a lingering bad taste in the mouths of the company’s well-heeled (and demanding) customer base, which could have a far longer lasting impact.”

On Thursday, Chukumba lowered his rating on the high-end furnishings company to “hold” from “buy.” Restoration Hardware shares were down more than 5 percent midmorning, to under $37. Since January, the company’s stock has fallen more than 50 percent.

Aside from slow delivery times, Restoration Hardware said softness in markets affected by energy, oil or currency fluctuations, along with affluent consumers’ reluctance to spend, contributed to its weaker-than-expected results.

In that vein, Williams-Sonoma on Wednesday reported fiscal fourth-quarter results that fell short of analysts’ expectations. Comparable sales at its high-end Pottery Barn and PBteen brands declined 2 percent and 12 percent, respectively, offsetting 13 percent growth at the more moderately priced West Elm concept.

Despite economic softness, Restoration Hardware’s Friedman reiterated to investors last month that its key growth strategies — expanding its product selection and identifying opportunities to generate value from its real estate — “are working exceptionally well.”

In its pre-announcement, the retailer said that it earned an adjusted 99 cents a share in the fourth quarter, compared with Wall Street estimates of $1.39. The company will report complete results for the quarter and full year on March 29.

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