These Two Experts Think Restoration Hardware Is Still Worth $50

Restoration Hardware Holdings Inc (NYSE: RH) reiterated its FY16 store count outlook and revenue and operating margin targets. Deutsche Bank’s Adam Sindler maintained a Buy rating on the company, while reducing the price target from $60 to $50, saying that the company still needs to clear several hurdles.

Store Openings On Track, But Gross Margin Pressure Likely

The company provided balanced guidance for sales and EPS, while allaying concerns over the performance being comp negative. Although the guidance models a slower opening rate, the company may be able to reach about 63 Full Line Design Galleries by 2024, analyst Adam Sindler mentioned.

Restoration Hardware may have a bumpy year in 2016. Sindler mentioned the key concern areas as the pace of recovery on Modern delivery and in-stock levels, the impact of the company’s shift to a member model, shifting the Indoor Source Book to the 3Q in 2016 from 2Q in 2015, and the impact of the timing of store openings.

All these factors are expected to adversely impact the company’s gross margins. The EPS estimates for FY16 and FY17 have been reduced from $2.90 to $2.67 and from $3.58 to $3.32, respectively.

Long Term Growth Remains Intact

In a separate note, UBS’ Michael Lasser maintained a Buy rating for Restoration Hardware, while reducing the price target from $55 to $50. The analyst said that although the company faces certain challenges in the form of turbulence in the oil markets and the decline in its overall sales, its long-term growth potential remains intact.

Restoration Hardware expects to post FY16 revenue growth in the LSD-MSD range, including a 7-8 percent increase in 1Q and flattish sales in 2Q and 3Q. Analyst Michael Lasser considers the guidance as conservative.

“There will be some impact from RH sending its sourcebook later in the year, but it should see less of a drag from Modern out-of-stocks (its current in-stock rate is in the 70% range & should climb to mid-80% by the end of 2Q). Plus, the drag from oil markets should diminish as it laps the initial decline,” Lasser wrote.

Restoration Hardware’s attempts to deal with in-stock issues are likely to limit its earnings in FY16, but the drags are expected to be eliminated next year.