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Insiders Restore Profits at Restoration Hardware, Keep
Buying Shares
By Michael Brush
April 20, 2005
Restoration Hardware (RSTO),
a troubled upscale home furnishings chain, has spent years trying to restore
its own luster -- and the efforts may finally be paying off.
For the first time since 1998, the Corte Madera, CA-based retailer reported
an annual profit when it released 2004 results at the end of March. It looks
like you can expect more of the same – and continued share price gains --
for the following reasons.
Insider buying
First, right after the profit news in late March, director Glenn Krevlin
bought $2.9 million worth of Restoration Hardware stock in the $5.72 to
$6.04 range. Though Krevlin made untimely purchases a few years back, it’s a
positive sign when the same insider continues to buy as a stock goes up.
Last year, he purchased $600,000 worth in March at $4.
Turnaround should continue
For the most recent quarter, Restoration Hardware reported downright solid
same store sales gains of 5.7% (increases in sales at stores open for more
than a year). It expects more of the same for the coming year. An ongoing
turnaround should help the chain get there. Restoration hardware is
remodeling stores; expanding its offerings in more profitable product groups
like lighting, textiles and furniture; and revamping its distribution
system.
Stock still looks cheap
Restoration Hardware has been in a sustained up trend since early 2003 when
it traded for $2 – a good technical sign. But the retailer still looks
cheap. It recently traded for just .4 sales. With the exception of a few
outliers, retailers typically sell for anywhere from .4 to 2 times sales.
Not too late to buy
Many investors are probably leery of home remodeling stocks like this one,
because of rising interest rates. But business at these kinds of stores does
not correlate to changes in interest rates. Instead, revenue trends show a
linkage to consumer strength indicators – like the levels of unemployment,
consumer confidence and income levels.
Yes, these can be linked to interest rates. But there is a lot of economic
stimulus out there – from huge federal budget deficits to low real interest
rates, and a cheap dollar which makes U.S. goods more attractive abroad. So
it’s not likely the Federal Reserve Board will kill the recovery with its
current rate hiking campaign. The higher price of gasoline will have less of
an impact on an upscale home furnishings store like Restoration Hardware.
Bottom line: Just remember that insiders typically buy early, and
this is a turnaround. So it’s a position for patient investors. Likewise,
there’s no need to rush into the stock. I’d be a buyer under $6.04, the top
price Krevlin paid. The stock seems to have solid support at around $5 so
that could be your downside risk.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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