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Restoration Hardware gets boost

With a new merchandising strategy apparently kicking in, sales and margins both came in unexpectedly strong at Restoration Hardware Inc., enabling the upscale specialty retailer to narrow its first-quarter loss by almost a third, to $5.2 million from $7.5 million last year.

Sales and same-store sales both leaped higher by 17.6 percent, to $81.8 million from $69.4 million during the same period a year ago.

The performance in the year's opening quarter exceeded even the company's own expectations, with a reported loss of 17 cents easily besting the company's earlier forecast of a loss of 20 to 22 cents per share.

Gary Friedman, president and ceo, said, "Our comparable store sales increase of 17.6 percent in April, on top of a double-digit increase in the April period a year ago, demonstrates that our new strategy is being embraced by our customers."

But given the broadly weak retail environment, the retailer is forecasting smaller gains going forward. "Despite the recent positive sales trends, we believe it remains prudent to plan conservatively within the current economic climate. Looking forward, we are planning second-quarter comparable store sales to increase in the mid-single digits, and forecasting a loss of nine to 11 cents per share for the quarter, vs. a loss of 13 cents in the second quarter a year ago." For all of this year, Friedman said, the retailer is holding to its earlier guidance that it will generate an operating profit in the range of one to two percent of sales.

Along with the top line, average gross margin strengthened considerably, widening by 870 basis points, or 8.7 percentage points, to 24.4 percent from 15.7 percent the preceding year.

But, while costs declined as a percentage of sales, they still far exceeded the company's average gross margin, producing an operating loss. Improving on the stronger sales level, SG&A expenses were reduced by 530 basis points, or 5.3 percentage points, to 34.3 percent of sales from 39.6 percent last year. Measured in absolute dollars, costs actually increased by 2.1 percent, to $28.0 million from $27.5 million.

By the end of the quarter, the retailer's cash position was $1.8 million, down from $2.2 million last year. And, inventories climbed higher by 27.9 percent, to $99.7 million from $78.0 million a year ago.

The specialty retailer operates 105 retail stores in 31 states, the District of Columbia and Canada.

Restoration Hardware Inc.

Qtr. 5/3 (x000) 2003 2002 % chg
a- First-quarter results include an income-tax benefit of $3.5 million from $10.2 million last year. Results in the same quarter a year ago include $358,000 in preferred share dividends.
Sales $81,766 $69,377 17.9
Oper. income (EBIT) (8,088) (16,570)
Net income (5,190)a (7,451)a
Per share (diluted) (0.17) (0.25)
Average gross margin 24.4% 15.7%
SG&A expenses 34.3% 39.6%

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