Insiders Are Selling Restoration Hardware

Oct.28.13 | About: Restoration Hardware (RH)

In this article, I will feature one home furnishing store that has seen intensive insider selling during the last 30 days. Intensive insider selling can be defined by the following three criteria:

  1. The stock was sold by three or more insiders within one month.
  2. The stock was not purchased by any insiders in the month of intensive selling.
  3. At least two sellers decreased their holdings by more than 10%.

Restoration Hardware (NYSE:RH) engages in the retail of home furnishings.

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Insider selling during the last 30 days

Here is a table of Restoration Hardware's insider-trading activity during the last 30 days by insider.

Name Title Trade Date Shares Sold Rule 10b5-1 Current Ownership Decrease In Ownership
Eri Chaya Director Oct 16 25,000 No 58,045 shares 30.1%
Ken Dunaj COO Oct 3-4 50,000 No 85,280 shares 37.0%
James Chu Director Sep 30 3,978,731 No 0 shares 100%
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There have been 4,053,731 shares sold by insiders during the last 30 days. More details about the Rule 10b5-1 trading plan can be found from this link.

Insider selling by calendar month

Here is a table of Restoration Hardware's insider-trading activity by calendar month.

Month Insider selling / shares Insider buying / shares
October 2013 75,000 0
September 2013 3,978,731 0
August 2013 1,175,797 0
July 2013 7,836,137 100,000
June 2013 0 0
May 2013 9,933,613 0
April 2013 0 0
March 2013 0 0
February 2013 0 0
January 2013 0 0
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There have been 22,999,278 shares sold and there have been 100,000 shares purchased by insiders this year.

Financials

Restoration Hardware reported the fiscal 2013 second-quarter, which ended August 3, financial results on September 10 with the following highlights:

Revenue $382.1 million
Net loss $17.8 million
Cash $15.0 million
Debt $87.6 million
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Outlook

Restoration Hardware's guidance for the third quarter of fiscal 2013 is as follows:

Revenue $385-$395 million
Adjusted net income $11.2-$12.0 million
Adjusted diluted EPS $0.27-$0.29
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Restoration Hardware's guidance for the fourth quarter of fiscal 2013 is as follows:

Revenue $490-$500 million
Adjusted net income $34.3-$35.5 million
Adjusted diluted EPS $0.81-$0.84
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Restoration Hardware's guidance for the fiscal year ending February 1, 2014 is as follows:

Revenue $1.56-$1.58 billion
Adjusted net income $67.6-$69.5 million
Adjusted diluted EPS $1.65-$1.70
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Competition

Restoration Hardware's competitors include Macy's (NYSE:M), and Williams-Sonoma (NYSE:WSM). Here is a table comparing these companies.

Company RH M WSM Industry Average (Home Furnishing Stores)
Market Cap: 2.72B 16.89B 5.12B 2.24B
Employees: 2,100 175,700 7,200 3.70K
Qtrly Rev Growth (yoy): 0.31 -0.01 0.12 0.00
Revenue: 1.37B 27.88B 4.22B 1.37B
Gross Margin: 0.36 0.40 0.39 0.40
EBITDA: 91.51M 3.73B 583.58M 91.51M
Operating Margin: 0.05 0.10 0.10 0.07
Net Income: -44.67M 1.37B 271.02M N/A
EPS: -4.25 3.46 2.71 1.03
P/E: N/A 12.99 19.74 19.74
PEG (5 yr expected): 1.33 0.95 1.48 1.33
P/S: 1.99 0.61 1.21 1.21
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Restoration Hardware has the highest P/S ratio among these three companies.

Here is a table of these competitors' insider-trading activities this year.

Company Insider buying / shares Insider selling / shares
M 7,125 1,569,559
WSM 0 215,037
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Only Restoration Hardware has seen intensive insider selling during the past 30 days.

Conclusion

There have been three different insiders selling Restoration Hardware and there have not been any insiders buying Restoration Hardware during the past 30 days. All three of these insiders decreased their holdings by more than 10%. Restoration Hardware has an insider ownership of 10.40%.

Restoration Hardware is trading at a forward P/E ratio of 32.70 and the company has a book value of $12.90 per share. Before entering short Restoration Hardware, I would like to get a bearish confirmation from the Point and Figure chart. The two main reasons for the proposed short entry are relatively high P/S ratio and the intensive insider selling activity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.