Editors Note:

Restoration Hardware was crushed in June because of production delays with a new product. These have been resolved and Q3 should show a different picture.


RH - Restoration Hardware - Company Profile

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

On June 22nd, shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

On July 18th Friedman bought 32,918 shares of the stock at an average price of $27.75 or roughly $915,000. He did not need to make this buy since he already owns 2,207,451 shares. A CEO would only buy another million dollars of the stock if he really believed it was going higher. Director Keith Belling bought 4,000 shares on June 28th for $101,000 to bring his holdings up to 18,608 shares.

If the market continues higher I would expect RH to break through resistance at $31.25. Because of the potential for a market decline I am putting an entry trigger on the position. The option is cheap so we will not have much risk.

With a RH trade at $31.50

Buy Sept $35 call, currently $1.10, no initial stop loss.


No New Bearish Plays