Skip to main content

Shares of

Restoration Hardware


jumped 14% Thursday on news that it narrowed its third-quarter loss. But the big question for investors is whether the retailer will meet its goals for profitability.

The company reduced its loss to $2.4 million, or 8 cents a share, from $8.7 million, or 36 cents, a year ago. Net sales rose 20% to $90.7 million from $75.5 million last year. Sales at stores open at least a year rose 14.8%, and direct sales to customers, which include catalog and Internet, gained 66%.

The stock leapt 86 cents to close at $7.16 on the news.

Looking ahead, the home furnisher predicts earnings of 41 cents to 42 cents a share for the fourth quarter on revenue of about $161 million. "We have a high level of confidence about the fourth quarter," the company said on a conference call with analysts.

Nevertheless, some analysts say significant challenges still lie ahead for the upscale retailer -- whose stock has ballooned by 156% since a recent low in August.

TheStreet Recommends

"They still need to improve the top line in order to make the business economics work," said Rob Wilson, former treasurer of Restoration Hardware who now runs Tiburon Research Group. The analyst wouldn't say whether he expects the company to make its fourth-quarter numbers.

Wilson cited some successes at Restoration: It is sourcing merchandise directly from overseas vendors, meaning that it will improve margins because is getting goods cheaper. But, he said, it needs to prove its ability to build products around its core furniture and lighting categories.

Moreover, Restoration is up against a tough retail environment, heading into the holiday season.

The company says it has been encouraged by its holiday offerings, however. "Our stores, catalogs and Web site are merchandised with compelling products reflecting Restoration Hardware's authentic American point of view," the company said in its third-quarter press release.

Just two years ago, the retailer was in the midst of a liquidity crisis and on the verge of bankruptcy. It managed to secure financing and hired Gary Friedman, former head of

Pottery Barn

, as its turnaround chief executive. The company -- which debuted amid the IPO hullabaloo in 1998 -- then began using the new cash to remodel its stores, clean up inventory, get rid of knick-knacks and bring in a line of textiles.

Now, Restoration Hardware has a much cleaner balance sheet. And the company expects to be debt free by the end of the year. Still, the retailer needs to show it can improve its margins in the fourth quarter. They came under pressure in the last quarter, with the introduction of a private-label credit card that offered 10% off first purchases. As a result, the company was forced to take down its third-quarter estimates by 2 to 3 cents a share. The company has since stopped aggressively promoting its credit-card incentives.