Getty Images
RH, formerly Restoration Hardware, saw its shares nosedive nearly 26% in Friday trading after the company announced a downward revision of its earnings guidance, a result of plans for further merchandise liquidation that are part of a larger effort to build out its food and beverage business and other efforts.
Despite the fall, analysts ultimately think the initiatives will differentiate the company against competitors like Amazon.com Inc.
RH RH, -25.69% attributed part of its first-quarter sales beat to liquidation and markdown activity, and said it would continue through the second and third quarters. The company reported sales of $562.0 billion, up from $455.5 billion last year and ahead of the $556.0 billion FactSet consensus.
Chief Financial Officer Karen Boone said additional merchandise is on a list of things the company is “going to get out of.”
“The outlet business is just mostly second-quality goods,” she said during the late-Thursday call with analysts, according to a FactSet transcript. “We don’t have an intention to have that be a growth vehicle for the business.”
See also: Best Buy is capitalizing on troubles at Sears and HHGregg in one particular category
See also: This is how Best Buy gets so many of its customers to come into its stores
However, the furniture and home décor company’s initiatives will have an impact on earnings, with RH cutting the forecast to below consensus. The company sees adjusted EPS in the second quarter in the range of 38 cents to 43 cents. The FactSet estimate is for 47 cents.
“Unfortunately, aggressive SKU rationalization efforts and incremental operating investments… will impact near-term earnings significantly more than prior expectations (ours, the Street’s, and management’s guidance),” wrote Raymond James in a Friday note.
Analysts there are “fans” of the company’s long-term growth strategy, but Raymond James rates RH shares market perform.
Cowen & Company analysts agree that the investments are smart ones for creating a company that can compete with Amazon. AMZN, +1.08%
“While we believe RH is pursuing the right long-term decisions to make its business truly ‘un-amazon-able,’ we acknowledge near-term risk factors remain,” analysts wrote in a Friday note
Among those risk factors is the company’s hospitality business.
Don’t miss: Every time this happens, Amazon crushes another legacy retailer
See: Gymboree is closer to bankruptcy after skipping interest payment
“RH remains focused on maintaining total control of its content from concept to customer, with investments focused on differentiating the RH brand across every touch point,” the note said. “...While these efforts should benefit revenue and cash flow, we have concerns that execution of the new business model may prove more timely/costly than anticipated.”
Cowen rates RH market perform with a $44 price target.
UBS analysts believe RH “took a step back” with its Thursday release.
“While these steps could ultimately position the company for success over the long run, we think this is a lot happening at the same time,” analysts wrote in a Friday note. “As such, it’s tough to assess the true underlying trend of the business outside of its temporal factors and investments.
UBS rates RH shares neutral with a $45 price target.
RH shares are up 36.3% for the past three months outpacing the S&P 500 index SPX, +0.37% , which is up 2.4%.
