Why Restoration Hardware Holdings, Inc common stock (NYSE: RH) stock is falling

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Restoration Hardware Holdings, Inc common stock (NYSE: RH) stock lost over 9.9% on March 31st, 2020 (Source: Google finance) after the company delivered bad earnings for the fourth quarter of FY 19. The revenue shortfall in the fourth quarter was on the back of two temporal issues. One, the elimination of the Holiday assortment created unforeseen collateral damage to the core business driven by the lower customer traffic in both the stores and online during the peak weeks, and two, the company had experienced higher than expected backorders due to inventories being down 18% year over year. While it’s hard to be precise forecasting business transitions such as the elimination of Holiday short term, long term it has proven to be the right decision, which has elevated the RH brand while significantly improving profitability and cash flow. Further, due to the significant disruption to financial markets and retail business operations, the company has withdrawn all prior guidance and outlook statements that relate to the performance of the business with respect to fiscal year 2020. The company has also deferred new business introductions and capital spending, while reducing costs to navigate through the short term challenges of this crisis.

RH in the fourth quarter of FY 19 has reported the adjusted earnings per share of $3.72, while reported 1 percent fall in the adjusted revenue to $665 million in the fourth quarter of FY 19, missing the analysts’ estimates for revenue of $709.6 million. The company posted the adjusted operating margins to a record 17.4% in the fourth quarter, which reflects an expansion by 230 basis points compared to 15.1% last year. The record results were due to higher product margins, along with lower occupancy and shipping costs due to the elimination of the Holiday assortment and the continued efficiencies of our new operating platform.

Moreover, due to the closing of the Galleries, Restaurants, and Outlets, the company’s core RH business demand is running down about 40% to last year, while total Company demand, inclusive of both Restaurants and Outlets are running down approximately 43%. In addition, the Outlet business was down 50% in February. The company is expecting the higher Outlet merchandise margins to increase total Company operating margin about 100 basis points for the full fiscal year.

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