Editor's Note: This column was originally sent to subscribers of TheStreet.com Stocks Under $10 on Nov. 19, the morning after Restoration Hardware reported its third-quarter earnings.
announced results for its third quarter Nov. 19. The top line came in better than expected, but higher advertising costs related to increased circulation of its catalog in September -- which didn't produce the projected sales results -- pushed the company into a deeper bottom-line loss than the Street expected.
For the quarter, the company reported sales of $118 million, 23% ahead of year-ago levels, with its net loss coming in at 9 cents a share, flat vs. a year ago.
Guidance for the fourth quarter was a bit light, calling for a per-share profit of 26 cents to 30 cents vs. a consensus number of 33 cents a share, but we believe the company's consistent sales growth, cost-savings initiatives and better merchandising strategy will help it deliver results to the upside of this forecast.
We were very negative on the prospects for this quarter and even went so far as to sell part of our position based on the belief the company would disappoint the Street. Although the numbers were light, the company has made a ton of progress in its turnaround effort, and comments on the conference call went a long way to increase our confidence that management's efforts are targeted at the right areas.
In the quarter, direct-to-customer sales, made up of Internet and catalog business, increased 78% year over year; same-store sales rose 8.7%; and the company reported its third straight quarter of 20%-plus sales growth without adding any additional square footage.
One of the more underpublicized moves was the addition of Bob Hassen to the role of senior vice president of supply chain management. Restoration has been plagued with distribution problems and merchandising issues for years, and Hassen's 20 years of experience should help the company improve supply chain efficiency. Although he has only been on the job for a week, management spoke confidently about the traction he has already gained in the business.
In addition to Hassen, it is also worth mentioning that management plans to do away with consultants at its distribution centers, a move that will save the company $1 million in the fourth quarter.
We believe Restoration is finally on the right track. This quarter confirms that this Inflection Point play is making progress and is poised to turn in a full year of profitability and outperform the market over the next year. Of course, if the analysts don't see it as we do, there's a chance the stock will sell off some on this report and we can add back the 500 shares we sold last week at $5.51 a share.
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William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to
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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to