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Monday, June 30, 2014 - 12:30

This Stock Is A Tiger Cub's Favorite Retailer

Monday, June 30, 2014 - 12:30pm

Every few years, a hot new hedge fund manager emerges on the scene. Today, that hedge fund manager looks to be Julian Robertson's protege Chase Coleman.

One of Robertson's "Tiger Cubs," Coleman learned from his mentor to look for a "smart idea, grounded on exhaustive research, followed by a big bet."

My colleague David Sterman profiled Coleman in 2012 after his Tiger Global fund was the top-performing hedge fund for all of 2011, with a gain of 45%. In 2012, Coleman was buying shares of Facebook (Nasdaq: FB) when they were only $29.

Now, Coleman manages about $14 billion at Tiger Global. Along the way, he has made himself a billionaire with a net worth of $1.6 billion, according to Forbes.

Coleman is now turning his attention to retail, particularly shares of luxury home furnishings retailer Restoration Hardware (NYSE: RH). Tiger Global just increased its stake last month by 1.25 million shares and now owns 6.4% of the company.

It's easy to see why Coleman increased his stake in the company. The company is firing on all cylinders and outperforming the home furnishings industry and its competitors.

In the first quarter, Restoration Hardware reported earnings per share (EPS) of $0.18, beating analysts' expectations by $0.07. EPS and revenue were up 200% and almost 22%, respectively, from the same quarter a year ago.

Restoration Hardware's comparable-brand growth has also been impressive. The retailer has increased its comparable-brand revenue by 57% over the past two years and has seen four consecutive years of 25%-plus growth, making it one of the few retailers to sustain that level of growth.

The company's stellar performance has helped its stock price reward shareholders nicely. Shares of RH are up 34% this year.

RH Chart

RH data by YCharts

What really sets Restoration Hardware apart from its competitors is its multi-channel approach. The company is not only a brick-and-mortar retailer (with 69 retail locations), but also sells its home furnishings on the Web and through its Source Books catalogs.

Another notable aspect of Restoration Hardware's business model is that it took a page from Apple's (Nasdaq: AAPL) playbook. Like the Apple Store, Restoration Hardware stores are becoming anchor tenants for upscale shopping centers. Its most recent store just opened in center of Greenwich, Connecticut, one of the wealthiest communities in the U.S.

Restoration Hardware remains in expansion mode and plans to open larger stores in Los Angeles and Atlanta this year. In addition, Restoration Hardware is adding two floors to its flagship store in New York. The company has already signed six leases for its new larger-format stores and is in negotiations for 25 more locations.

This year, Restoration Hardware forecasts total sales to grow over 20% to nearly $1.9 billion. EPS for the year is expected to come in at $2.31, up from $1.71 a share last year. Over the long run, CEO Gary Friedman sees the company generating $4 billion to $5 billion in annual sales once its store rollout is complete.

Shares of Restoration Hardware trade at a forward price-to-earnings (P/E) ratio of 31 based on next year's earnings estimates. Analysts expect annualized earnings growth of 28% over the next five years, putting RH's P/E-to-growth (PEG) ratio at 1.1. That compares favorably to competitors Bed Bath & Beyond (Nasdaq: BBBY) at 1.2 and Williams-Sonoma (NYSE: WSM) at 1.4.

Risks to Consider: Shares of Restoration Hardware are up strongly this year on the company's robust growth. If the company for some reason is unable to maintain its current growth rate, shares could see a sell-off.

Action to Take --> Follow Coleman's lead and purchase shares of Restoration Hardware, one of the fastest-growing retailers. Its three-year average annual growth rate of 26% easily surpasses all other major retailers.

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Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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