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Actionable news in WSM: WILLIAMS-SONOMA Inc,

Restoration Hardware Is Going From Bad To Worse

Summary

Company reported weak Q1 results and offered dismal Q2 and full year FY16 guidance.

Recent decision to turn the business model upside down carries elevated risk.

With virtually zero visibility into the potential impact of recent strategy changes and initiatives, management's dramatically reduced forecast might prove too optimistic once again.

The stock looks still richly valued at current levels and might suffer additional downside.

Restoration Hardware (NYSE:RH) just reported another set of poor earnings numbers and absolutely abysmal guidance that should not come as a surprise to my followers but obviously still caught the street flat footed.

Shortly after the company's earnings warning for Q4/FY15, I published an article "Short Restoration Hardware Going Into March 4th Quarter Earnings - Things Are Going To Get Even Worse" that correctly predicted most of the issues management now finally admitted to.

That said, my advice to short the shares into the final earnings release turned out to be ill-timed as on the one hand management still stuck to its usual pattern to give out overly optimistic forward guidance in the Q4/FY15 press release and on the other hand the share price got some additional support by a major 7% rise in the S&P 500 during the five-week period between the warning and the final earnings release.

So instead of slowly descending to the $30 area going into the earnings release and to move even lower thereafter in light of dismal guidance as predicted in my article, the company's shares instead remained range bound around the $40 mark after the initial 25% haircut caused by the earnings warning. Even worse the shares managed to put together some sort of short squeeze after the final earnings release, temporarily lifting the stock above the mid-$40s levels until the end of April.

Since then, the shares finally went into the major tailspin ultimately expected by me with some cushioning once again provided by the ongoing strength in the overall market.

The shares closed today's session down 20%, a rather moderate decline in light of half a dozen analyst downgrades and some additional major price target reductions. The street is clearly losing patience with management and for good reason as it has been neither proactive to address issues already witnessed for some time nor straightforward to investors about the potential impact of the recent multiple strategy changes on the company's business.

Actually it turned out that my predictions from the outside were much closer to reality than management's own guidance given being already eight weeks into Q2/FY16:

(...) the current analysts' consensus for Q1 calls for $465 mln in revenues and $0.21 in earnings per share. This would still imply 10% revenue growth year-on-year and does not look appropriate given the multiple problems the company is obviously facing. Only a major clearance sale could help RH arriving at these revenue levels but this would effectively bring down the earnings per share number far below expectations or perhaps even to the break-even level.

While analysts subsequently lowered their Q1 revenue and earnings per share expectations down to $455 mln and $0.05, the company still missed, particularly on the bottom line.

But the real cause for investor concern is in fact the company's guidance for Q2 and...


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