Restoration Hardware Shakes Off the Rust

Nowadays you'd expect investors to head for the exits after a multiquarter earnings restatement. But Restoration Hardware(RSTO) bulls were saying Thursday that the upscale home decor chain's turnaround story is stronger than ever.

Shares were off just 3% Thursday afternoon after the company laid out plans to restate earnings for 2000 and the first three quarters of 2001. The company said the restatement came after a Securities and Exchange Commission review of how the company booked revenue from the sale of furniture. Restoration will now book sales at the time of delivery rather than at the time of shipment.

But everyone from the company on down seemed prepared to essentially ignore the news of the SEC-inspired accounting change. On a conference call, executives focused on solid sales from the company's new private-label linens business and noted that Restoration wasn't forced to resort to aggressive markdowns in January, as it did a year ago.

"People didn't understand it," says Daniel Schwarzwalder, managing director of Buckingham Capital, which owns more than 250,000 shares in Restoration Hardware. "It's not a big thing. The story is stronger than ever and intact."

In-Line Skating

Indeed, in a Thursday morning conference call, executives predicted the company would return to profitability in 2002 and projected that comparable-store sales -- which gauge activity in shops open at least a year -- will rise by double digits percentagewise in April. Same-store sales rose just 0.1% in the fourth quarter.

Restoration Hardware, based in Corte Madera, Calif., said the earnings restatement came after the company filed with the SEC to sell new shares. The change will reduce revenue by no more than $5 million in any quarter and no more than $3.5 million for the fiscal year that ended Feb. 3, 2001, and have no effect on cash, receivables, accounts payable or debt.

Restored Indeed Stock bouncing back lately

News of the restatement came as the company reported that it lost 53 cents in the fourth quarter that ended Feb. 2, including a $24.5 million one-time charge associated with leases and inventory. This compares with earnings of 55 cents a share in the year-ago period. Sales came in at $144.3 million in the quarter, roughly flat with a year ago.

Only one analyst officially covers Restoration Hardware. Richard Nelson, of Stephens, stopped publishing earnings estimates in January due to the "lack of guidance from the company during this transition period."

The Cocooning Thesis

Shares in the company -- which soared around 700% last year and are up an additional 30% this year -- were off just 41 cents at $11.53 as investors kept their faith in Restoration's turnaround plans. Shares dropped about 15% in early trading before rebounding.

In the wake of Sept. 11, stocks of most home-oriented retailers, such as Pier One(PIR) and Williams Sonoma (WSM), did well as investors expected consumers to retreat to the home. Yet Restoration Hardware, which had traded under $2 within the last year, had already become a hot stock, especially after the hiring of Gary Friedman as CEO from Pottery Barn last spring generated enthusiasm for the turnaround.

The company, known for retro turntables and cocktail shakers, went through a steep decline in 1999 and 2000, partly from poor inventory management. On the conference call the company emphasized that it plans to close underperforming stores and has a new merchandising strategy for 2002. It plans to give more details on these initiatives next week at an analyst meeting in New York.

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