Are Restoration Hardware’s Mixed Signals a Problem?

Source: DesignMine

Restoration Hardware Holdings Inc (NYSE: RH) shares are trading at new highs after delivering one of the best quarterly reports of the season. The company’s comparable sales growth of 18 percent is atop the retail industry, and its direct-to-consumers approach with enormous catalogs has proved to be an excellent strategy for driving growth. Yet, insiders continue to sell and offer shares despite bullish long-term guidance. Therefore, how should you perceive these facts?

Never mind Restoration’s Hardware’s 57 percent increase in comparable-store sales over the last two years, or its 200 percent EPS improvement during the first quarter. Instead, focus on the long-term vision: The one that includes five new galleries this year after two years of zero store expansion, and another 25 locations being negotiated for future expansion.

This is a company operating in a niche luxury home-improvement market with aspirations of becoming a $4 to $5 billion a year company with operating margins in the mid-teens. Currently, Restoration Hardware has twelve-month revenue of $1.62 billion and an operating margin of 7.9 percent. Therefore, investors should note that there is room for a great deal of improvement, and stock gains if the company is successful.

Nonetheless, despite a market capitalization of $3.3 billion and the outlook for a much higher stock if the company’s goals are met, management continues to take advantage of its current stock price. For example, Restoration Hardware announced on Monday that it would offer $300 million worth of convertible senior notes due in 2019 with an option to sell another $50 million.

The company has less than $11 million on its balance sheet thus the logic behind this move is with reason, especially given its growth plan. The problem is that Restoration Hardware already has $302.6 million in short-term liabilities and total debt of nearly $150 million. Therefore, why put more pressure on the balance sheet?