Shares of Restoration Hardware (RH) are on the rise after the company reported better than expected second quarter results. However, Deutsche Bank and Cowen remain on the sidelines as both research firms believe the second quarter beat was driven by pull forward from the third quarter and, therefore, see the stock's strength after earnings as unjustified.
RESULTS: Restoration Hardware reported second quarter adjusted earnings per share of 44c and revenue of $543.4M, above consensus expectations of 29c and $511.4M, respectively. The company foresees third quarter adjusted earnings per share of 13c-18c, way below consensus expectations of 40c, and sees revenue between $520M-$530M, with expectations at 539.66M prior to the company's guidance. Additionally, Restoration Hardware backed its full year 2016 adjusted earnings per share view of $1.60-$1.80.
UPSIDE DRIVEN BY PULL FORWARD: In a post-earnings note, Deutsche Bank analyst Adam Sindler attributed Restoration Hardware's upside in the second quarter to pull forward from the third quarter, which he sees primarily related to its outdoor furniture. Therefore, the analyst told investors that he would view the quarter as in-line given the upcoming quarters' guidance. Sindler reiterated a Hold rating on the stock but raised his price target on the shares to $40 from $28 as he believes trends may have bottomed for Restoration Hardware, providing better visibility into 2017 estimates.
STRENGTH NOT JUSTIFIED: Cowen analyst Oliver Chen voiced a similar opinion to his peer at Deutsche Bank, saying he sees the strength in Restoration Hardware shares after earnings as unjustified. The analyst believes the company's second quarter beat was driven by "low-quality pull forward" of third quarter demand, since comparable sales were running negative and deteriorating in the second half. While Chen recognized the appeal of Restoration Hardware's long-term growth story, he noted there is too much uncertainty in sales inflection, execution issues and negative free cash flow for investors to get involved. Chen reiterated a Market Perform rating on the stock and lowered his price target on the shares to $33 form $35.
PRICE ACTION: In morning trading, shares of Restoration Hardware have gained over 9% to $38.58.
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