Restoration Hardware Holdings, Inc. (RH - Snapshot Report) announced the pricing of 0% convertible senior notes (maturing on Jun 15, 2019) worth $300 million. These notes are priced at a 35% premium to yesterday’s closing stock price of $85.99. The company also hit a 52-week high of $87.95 yesterday.
The company has offered initial buyers a 13-day option to buy another $50 million worth of notes on the same terms and conditions for a potential offering size of up to $350 million. Further, the company has entered into convertible note hedge and warrant transaction to avoid dilution up to a 100% premium to yesterday’s closing stock price.
The notes will be converted at a rate of 8.6143 shares per $1,000 principal amount of notes. This is equivalent to the original conversion price of $116.09 per share i.e. a premium of 35% over yesterday’s closing stock price.
Restoration Hardware is likely to use proceeds to fund business initiatives including the continual upgradation of its real estate platform, repayment of higher interest borrowings from the company's existing credit line, and further improvement of its balance sheet in the next five years.
The proceeds would also be utilized to meet the net cost of the convertible note hedge transactions and for general corporate purposes, (like repayment of entire outstanding debt under the company’s credit facility).
Recently, the company came up with remarkable first quarter fiscal 2014 results and provided an upbeat guidance. The company’s earnings of 18 cents per share grew threefold year over year and comfortably beat the Zacks Consensus Estimate of 10 cents.
The bottom line performance was driven by a robust 22% surge in the company’s net revenues of $366.3 million. Net sales also surpassed the Zacks Consensus Estimate of $346.0 million.
Management seems highly impressed with the company’s first-quarter performance despite eliminating the mailing of “Fall 2013” Source Book. The solid results coupled with its leading position in the home furnishings industry and multi-network business model make Restoration Hardware confident about its future prospects.
Going forward, the company plans to maintain its focus on transforming its retail outlets and expanding its product portfolio, with the latter taking a leading edge from its 2014 Source Books.
In fiscal 2014, the company plans to introduce new Galleries in Greenwich, and Los Angeles. The company also intends to open its first next generation Full Line Design Gallery in Atlanta. Further, it aims to increase the size of its New York Gallery – its best performing outlet, by adding 2 more levels to it. Restoration Hardware has already finalized lease contracts for 6 of its next generation Full Line Design Galleries and is in the process of doing the same for 25 more.
The company believes that subsequent to its real estate transformation in North America, it will record annual sales of $4–$5 billion, generating operating margins in the mid-teens and producing adequate free cash flow.
Taking a cue from these encouraging factors, Restoration Hardware upgraded its outlook for fiscal 2014. It now expects net revenues to range from $1.86–$1.89 billion, compared with $1.825–$1.86 billion predicted earlier. Moreover, it anticipates adjusted earnings per share to lie in the band of $2.24–$2.30, up from $2.14–$2.22 per share projected earlier.
Currently, Restoration Hardware carries a Zacks Rank #2 (Buy). Other players in the home furnishings industry, which look attractive at current levels, include Haverty Furniture Companies Inc. (HVT - Snapshot Report), Kirkland’s Inc. (KIRK - Analyst Report) and Williams-Sonoma Inc. (WSM - Analyst Report). All these stocks carry the same rank as Restoration Hardware.