Looking Past the Shine on Restoration Hardware
Restoration Hardware (RSTO) has crawled out of one hole, but some people wonder if its stock isn't heading down another.
Certainly the yuppie furniture and accessories chain has its fans. The stock has rallied into the $11 range this spring after trading for just pennies early last year. Same-store sales rose strongly last month, as the company continued to benefit from cocooning consumers' renewed interest in home furnishings.
But there are those who characterize Restoration's rebound as a classic case of smoke and mirrors. A former executive points to the strong competition in home furnishings and questions whether the company, which lost $34 million last year, can ever make a profit. A short-seller notes that insiders have filed to sell millions of shares, potentially flooding the market. Despite repeated promises, the company has failed to share financial guidance with Wall Street, prompting the one analyst who was covering the stock to give up.
"I think the fundamentals are bad," says Mike Swanson, who runs the Web site timingwallstreet.com and is short the stock. He notes that the company has been willing to make vague, optimistic-sounding promises but hasn't offered details of its expectations. "It seems the company can give a prediction about next year, but can't give any guidance about the next quarter," he says.
PromisesTo that end, Restoration has said only that it expects to return to profitability in 2003 and that it eventually hopes to have at least $1 billion in sales -- slightly less than triple last year's figure. Still, considering that the company lost $1.57 a share for 2002, the ambitious projections paint a picture of a company making steady progress toward reachable goals. That said, the company's recent past has been anything but smooth sailing. In March, the company announced it would have to restate earnings for 2000 and 2001 because of an accounting change. Meanwhile, short interest -- bets that the share price will fall -- is more than double the level of a year ago, according to figures provided by Nasdaq. Those figures point to a growing skepticism in some quarters.
Tracking sales, profits at Restoration ($millions)
|Source: Company news releases|
What's 'Realistic'Restoration, based in Corte Madera, Calif., was a hot stock following its 1998 IPO before fizzling under poor inventory management two years later. By the time the holidays rolled around in 2000, the company was out of cash and on the verge of filing for Chapter 11 bankruptcy protection, Wilson says. Restoration was able to secure financing in a preferred share deal, on the condition that it hire a CEO with extensive retail experience. In stepped Pottery Barn's Friedman, with a plan to eliminate clutter in the stores and slash the number of items sold. The company rolled out the new linens, and completed its store remodeling plan, in April, Shahan says. The early indication is positive: Same-store sales grew 10.5% from a year ago in April. Shahan says Restoration will finally give some financial guidance when it reports quarterly earnings on May 22. After that, he predicts Wall Street will again take notice. "It's not realistic to expect an analyst following without being in the routine of giving guidance," he says.
StockingOthers say the stock could be due for a fall because some of the investors who rescued the company in 2001 are preparing to bail out. In a February filing with the Securities and Exchange Commission, the company said that some 6.8 million shares owned by a variety of investment partnerships, some controlled by Glenn Krevlin, a director, may be sold. This would amount to roughly 30% of the total number of shares outstanding. Some worry that all that selling would send the stock cratering. "It certainly raises the red flags," says Swanson, the trader who is short Restoration. Another potential red flag, investors say, is that according to a recent SEC filing, two investment partnerships associated with Krevlin have been selling the stock short, betting on its decline. The partnerships don't list Krevlin as a principal, though they share a common address with Krevlin's investment vehicles. Krevlin didn't respond to a request for comment. To be sure, it isn't illegal for a director or his affiliates to short his company's stock, and Restoration disclosed in earlier filings that the partnerships could engage in short-selling to hedge against losses. However, such an arrangement is virtually unheard of, say experts. "It looks horrible," says Tom Twedt, a partner at the law firm Dow Lohnes & Albertson and an expert in securities law. "The perception is you're making a bet against the company." It's a bet other investors might consider making.
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