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Restoration Hardware Implodes


RH reported a disastrous Q1 and shares plummeted.

Lots of margin headwinds are in play for now but they should be largely transitory.

I think management is telling the truth about margins and that we'll see a sizable rebound in operating profits next year.

I've been long Restoration Hardware (NYSE:RH) in the past as I was enamored with the company's world-beating designs, unique customer experience and the growth track I saw for earnings. That hasn't exactly worked out as you can see from the chart below as RH has shifted its business model around a bit and some growing pains are emerging. That has never been more apparent than it was after the Q1 report was released and shares imploded, reaching new lows again. RH offered up some very conservative guidance but also reiterated its long-term operating goals. So at $28, should RH be left for dead?

It's difficult to fathom that what was once perhaps the hottest growth story in retail has subsequently lost about 70% of its value but that is exactly where we find RH today. Investors have completely lost patience with RH as the selloff subsequent to the Q1 report shows. Guidance was terrible and certainly came out of nowhere for most of us so I get the selloff. But this business is not dying so at some point there's some value to be had.

Total revenue did increase 8% as comparable brand revenue rose 4% during Q1. Those numbers are on top of multi-year growth stats that are well in excess of those numbers as RH used to grow by leaps and bounds. Of course, that surely has something to do with the selloff as RH's growth numbers in the mid-teens are apparently a thing of the past. But if we take stock of what RH is still accomplishing, things aren't so dire. RH is...