Despite last week’s revenues disappointment, Retail sector head Brian McGough sees Restoration Hardware (RH) as the one stock in his sector that might realistically double over the coming 12-18 months. In fact, McGough thinks revenues is one area where management have their hand firmly on the controls.
Last week, when the disappointing number was released, McGough wrote “if RH didn’t have a shift in source book timing, the stock would be up $10 at this point.” McGough is being bombarded with questions about this quarter’s revenues drop, but Wall Street’s microscopic quarter-by-quarter view shouldn’t blind us to the telescopic view. The company is pulling off one of the biggest real estate transformations the Retail landscape has seen in a decade. At the same time, it pares down reinvents its Source Book strategy, and doubles its product assortment from a year-ago (while simultaneously redesigning floorsets in all its stores).
Guidance calls for a meaningful acceleration on the top line in the back half of the year – up 600bps from the first half of 2014. With inventory and deferred revenue (custom orders and orders in transit) up 35% year over year, we have confidence that RH will hit back half revenue estimates. Wall Street’s disappointment over the second quarter revenue miss is reflected in a stock price that dropped a few points since the print – closing yesterday at $77.05.
McGough has long-term confidence in RH management’s ability to manage the increasing complexity as the business grows and transforms. If he’s right, the stock could double in the next 12-18 months. And he thinks the stock could then double again over the following 12-18 months.
That would be worth the wait.
