Transformation at Restoration Hardware

12/22/2014 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Our Top Pick is a furniture company that has a great growth story and just broke out to new highs, observes Mike Cintolo, editor of Cabot Top Ten Trader.

On its surface, Restoration Hardware (RH) looks like a high-end home furnishings maker that will ride the general housing market recovery in the quarters ahead.

But, when you dig into the story, you find the company is much more than that; it’s in the midst of a major transformation that, so far, has proven to dramatically boost sales, earnings and, just as important, Restoration Hardware’s image.

The company has a few dozen regular stores today, like those you see in the mall, but the problem is that these stores are only able to display a fraction of the company’s high-quality merchandise.

The solution? Huge, 50,000 square foot showrooms, which are just starting to open across the country. (A huge, once-a-year catalog also works as the primary marketing vehicle.)

In effect, the firm is breaking down the barrier between the consumer and designer, offering specialty products and even design consultation that can’t be found elsewhere.

It’s still very early in the story, as the firm has only opened a couple of its giant showrooms, and another dozen or two are coming down the pike, but results have been outstanding.

Long-term, management believes it can get revenue up to $4 billion as these showrooms build the brand and make it “easier” for consumers to purchase Restoration’s products. It’s an interesting idea.

RH looks primed to get going, if the market cooperates. The stock began building a huge base in June 2013, and looked like it was lifting off when it blasted ahead on earnings in June of this year…but the market correction pulled it down again.

Then it built another base and broke free from that last week on big volume. The only flaw in the chart is that the RP line has yet to punch out to new highs, but overall, the evidence points toward higher prices.

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