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Should Williams-Sonoma and Restoration Hardware Merge?
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Shares of Williams-Sonoma, Inc. (WSM - Free Report) and Restoration Hardware Holdings Inc. (RH - Free Report) rallied as the market speculated an acquisition of Restoration Hardware by Williams-Sonoma. Shares of Williams-Sonoma gained 2.68% while Restoration Hardware jumped 7.18% on Jun 22.
The rumors surfaced when analyst Anthony Chukumba of BB&T Capital Markets reportedly suggested on Wednesday that the acquisition of Restoration Hardware can be beneficial for Williams-Sonoma.
Chukumba had suggested such a possibility for the first time in Apr 2014. He still stands by what he said earlier and emphasized that Williams-Sonoma’s acquisition of Restoration Hardware “makes even more sense now than it did two years ago.”
Why is that so?
Things haven’t been smooth for Restoration Hardware lately. On Jun 8, the luxury home furnishing company reported dismal first quarter 2016 results. The company reported adjusted loss per share of 5 cents as against prior year quarter earnings per share of 23 cents. The quarterly loss was also much worse than the Zacks Consensus Estimate of earnings of 5 cents.
Even the top line results of this Zacks Rank #5 (Strong Sell) company were bleak, as revenues of $455.5 million missed the consensus mark of $459 million by 0.75%. Comparable brand revenues increased 4% during the quarter, falling short of a 15% increase in the prior year quarter. To top it all, the company lowered its outlook for fiscal 2016.
The disappointing first quarter 2016 results were largely due to short-term operational problems. Restoration Hardware launched a new line of modern furniture last fall, which is undergoing production delays, resulting in increased cost and lower revenues and profits. The company’s new paid membership program, which marks a shift from the discount offering promotional model, is also hurting revenues. In addition, market headwinds such as volatility in the energy market, unfavorable currency translations and an overall slowdown in the luxury consumer market are also hurting its revenues and profits. These issues are unlikely to get sorted any time soon. In fact, management does not expect any improvement before the fourth quarter of 2016 or early 2017. Restoration Hardware has lost about 65% in its share price year-to-date.
What’s in there for Williams-Sonoma?
Williams-Sonoma enjoys a competitive advantage owing to its multi-brand/multi-channel business model. The company has a strong international presence and is one of the largest e-commerce retailers in the U.S.
The acquisition of Restoration Hardware will help Williams-Sonoma cater to the luxury consumer market. Restoration Hardware is known for its luxury home furnishing products. Chukumba believes that the acquisition will widen Williams-Sonoma’s product range at various price levels, including entry level, mid range and premium price levels. Williams-Sonoma already offers entry level and mid range priced products through its West Elm and Pottery Barn products. The addition of Restoration Hardware will be an addition to its premium portfolio.
Also Restoration Hardware operates in multiple channels of distribution, including stores, catalogs, and websites. The acquisition will integrate the strength of these distribution channels, thereby creating synergies in terms of distribution, marketing and overhead expenses. Restoration Hardware will also benefit from Williams-Sonoma’s huge infrastructure for the development of new products, techniques and collaboration with other regional artists.
So What Now?
Investors will have to wait for now to see if there is any truth behind the speculations. In the meantime, they can focus on other stocks in the home furnishings space that are gaining momentum from an improving housing construction market. These include Ethan Allen Interiors Inc. and Mohawk Industries Inc. (MHK - Free Report) , both carrying a Zacks Rank #2 (Buy).
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Should Williams-Sonoma and Restoration Hardware Merge?
Shares of Williams-Sonoma, Inc. (WSM - Free Report) and Restoration Hardware Holdings Inc. (RH - Free Report) rallied as the market speculated an acquisition of Restoration Hardware by Williams-Sonoma. Shares of Williams-Sonoma gained 2.68% while Restoration Hardware jumped 7.18% on Jun 22.
The rumors surfaced when analyst Anthony Chukumba of BB&T Capital Markets reportedly suggested on Wednesday that the acquisition of Restoration Hardware can be beneficial for Williams-Sonoma.
Chukumba had suggested such a possibility for the first time in Apr 2014. He still stands by what he said earlier and emphasized that Williams-Sonoma’s acquisition of Restoration Hardware “makes even more sense now than it did two years ago.”
Why is that so?
Things haven’t been smooth for Restoration Hardware lately. On Jun 8, the luxury home furnishing company reported dismal first quarter 2016 results. The company reported adjusted loss per share of 5 cents as against prior year quarter earnings per share of 23 cents. The quarterly loss was also much worse than the Zacks Consensus Estimate of earnings of 5 cents.
Even the top line results of this Zacks Rank #5 (Strong Sell) company were bleak, as revenues of $455.5 million missed the consensus mark of $459 million by 0.75%. Comparable brand revenues increased 4% during the quarter, falling short of a 15% increase in the prior year quarter. To top it all, the company lowered its outlook for fiscal 2016.
The disappointing first quarter 2016 results were largely due to short-term operational problems. Restoration Hardware launched a new line of modern furniture last fall, which is undergoing production delays, resulting in increased cost and lower revenues and profits. The company’s new paid membership program, which marks a shift from the discount offering promotional model, is also hurting revenues. In addition, market headwinds such as volatility in the energy market, unfavorable currency translations and an overall slowdown in the luxury consumer market are also hurting its revenues and profits. These issues are unlikely to get sorted any time soon. In fact, management does not expect any improvement before the fourth quarter of 2016 or early 2017. Restoration Hardware has lost about 65% in its share price year-to-date.
What’s in there for Williams-Sonoma?
Williams-Sonoma enjoys a competitive advantage owing to its multi-brand/multi-channel business model. The company has a strong international presence and is one of the largest e-commerce retailers in the U.S.
The acquisition of Restoration Hardware will help Williams-Sonoma cater to the luxury consumer market. Restoration Hardware is known for its luxury home furnishing products. Chukumba believes that the acquisition will widen Williams-Sonoma’s product range at various price levels, including entry level, mid range and premium price levels. Williams-Sonoma already offers entry level and mid range priced products through its West Elm and Pottery Barn products. The addition of Restoration Hardware will be an addition to its premium portfolio.
Also Restoration Hardware operates in multiple channels of distribution, including stores, catalogs, and websites. The acquisition will integrate the strength of these distribution channels, thereby creating synergies in terms of distribution, marketing and overhead expenses. Restoration Hardware will also benefit from Williams-Sonoma’s huge infrastructure for the development of new products, techniques and collaboration with other regional artists.
So What Now?
Investors will have to wait for now to see if there is any truth behind the speculations. In the meantime, they can focus on other stocks in the home furnishings space that are gaining momentum from an improving housing construction market. These include Ethan Allen Interiors Inc. and Mohawk Industries Inc. (MHK - Free Report) , both carrying a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>