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Looking Past the Shine on Restoration Hardware

Restoration Hardware ( RSTO) has crawled out of one hole, but some people wonder if its stock isn't heading down another. Certainly the yuppie furniture and accessories chain has its fans. The stock has rallied into the $11 range this spring after trading for just pennies early last year. Same-store sales rose strongly last month, as the company continued to benefit from cocooning consumers' renewed interest in home furnishings. But there are those who characterize Restoration's rebound as a classic case of smoke and mirrors. A former executive points to the strong competition in home furnishings and questions whether the company, which lost $34 million last year, can ever make a profit. A short-seller notes that insiders have filed to sell millions of shares, potentially flooding the market. Despite repeated promises, the company has failed to share financial guidance with Wall Street, prompting the one analyst who was covering the stock to give up. "I think the fundamentals are bad," says Mike Swanson, who runs the Web site and is short the stock. He notes that the company has been willing to make vague, optimistic-sounding promises but hasn't offered details of its expectations. "It seems the company can give a prediction about next year, but can't give any guidance about the next quarter," he says. To that end, Restoration has said only that it expects to return to profitability in 2003 and that it eventually hopes to have at least $1 billion in sales -- slightly less than triple last year's figure. Still, considering that the company lost $1.57 a share for 2002, the ambitious projections paint a picture of a company making steady progress toward reachable goals. That said, the company's recent past has been anything but smooth sailing. In March, the company announced it would have to restate earnings for 2000 and 2001 because of an accounting change. Meanwhile, short interest -- bets that the share price will fall -- is...