Restoration Hardware drops on disappointing preliminary results; Chesapeake holds in

By Rebecca Melvin

New York, Feb. 25 – Restoration Hardware Holdings Inc.’s two series of 0% convertibles fell sharply on an outright basis and contracted on swap on Thursday as common shares of the Corte Madera, Calif.-based specialty retailer tumbled after preliminary results fell short of expectations.

The company’s quarter ended Jan. 30 was hurt by stock market volatility, depressed energy prices and currency fluctuations, among other things, chairman and chief executive Gary Friedman said in a news release.

In particular stock market volatility hurt the high-end consumer that generally makes up its customers, Friedman said.

Restoration Hardware’s 2020 convertibles fell about 10.5% on an outright basis, its 2019 convertibles shed about 9% and the shares tanked 26%.

Elsewhere, there were convertibles that expanded on the day. Spirit Realty Capital Inc.’s 2.875% convertibles were up 0.5 point on swap against shares that added 1.7%. Tesla Motors Inc.’s A and B tranches were a touch better. Liberty Media Corp.’s 1.375% securities gained about 0.375 point to 0.5 point on swap. And Anthem Inc.’s 2.75% convertibles were about 0.125 point better, a New York-based trader said.

Chesapeake Energy Corp.’s 2.5% convertibles recovered to end about unchanged on the day after slipping back a point or so in early trading. The Chesapeake common shares retraced about 5% of the prior day’s 23% gain. The Wednesday increases were based on news of debt buybacks and other measures being taken to conserve cash and improve its balance sheet.

The Chesapeake 2.5% convertibles due 2037 ended the session at around 42.75 after earlier trades at 41.25 and after rising 30% on Wednesday to 43 from 33.

The news was part of Chesapeake’s quarterly results that revealed how difficult things have been for the debt-laden energy producer as commodity prices remain lower for longer than expected.

Fitch Ratings said it downgraded Chesapeake’s long-term issuer default rating to B- from B and said the outlook remains negative.

Fitch said the downgrade reflects the company’s heightened liquidity risk given the prospect for a lower and longer price recovery profile. The rating also reflects the potential for low hydrocarbon prices, which might negatively impact the company’s plans to raise liquidity through asset sales, the agency said.

This increases the prospect that the company might more quickly and heavily rely on its revolving credit facility to fund upcoming debt maturities, Fitch said.

The ratings also consider the company’s considerable size with the potential for more liquids-focused production, substantial asset base and strong operational execution and flexibility, Fitch said.

Primary remains quiet

The U.S. primary market was silent again on Thursday, marking a full week since the last new deal hit the secondary market.

Invacare Corp.’s $130 million of notes priced Feb. 18. The lull of a week wasn’t that surprising given that there have only been four new deals in the U.S. market for the year so far.

Before Invacare, Hess Corp. priced $500 million of 8% mandatory convertible preferred shares; KemPharm Inc. priced $86.25 million of 5.5% convertible notes due 2021 and Novavax Inc. priced $325 million of 3.75% convertible notes due 2023.

So far the U.S. market has seen only $1 billion of new paper.

Meanwhile, the European market, while not wildly exuberant, has outperformed the U.S.

Grand City Properties priced an upsized €450 million of six-year notes this week. Vodafone plc placed £2.88 billion of mandatory convertible bonds in two tranches, including a 2017 tranche to yield 1.5% and a 2019 tranche to yield 2%, last week LVMH priced $600 million of 0% convertibles on Feb. 4, and Safran SA priced €649.99 million of 0% convertibles at the year’s opening on Jan. 5.

Restoration Hardware falls

Restoration Hardware’s newer 0% convertibles due 2020 traded down to 68 from about 76 previously. The 10.5% drop compared to a 9% fall for Restoration Hardware’s older 0% convertibles due 2019, which fell to 76 from 82.5.

Shares of Restoration Hardware fell $13.53, or 26%, to $38.40. It was the most that the shares have fallen in one day since the company’s initial public offering in 2012.

The company blamed disappointing preliminary earnings on U.S. stock market volatility since the beginning of the year. January is the company’s biggest month of the quarter for furniture sales, CEO Friedman said in a note to shareholders that was part of the business update.

The company earned 99 cents per share excluding items for its fourth quarter. That missed the $1.40 per share that analysts were expecting. Revenue was $647.2 million, which missed the $711.1 million revenue estimate.

Slumping energy and currency fluctuations also contributed to the company’s woes, Friedman said.

Also the company said that another problem was that its attempt to drive incremental revenue through increased promotional activity in the fourth quarter was less successful than in prior periods. This signaled a further pullback by the high-end consumer, Friedman said.

“Our sense is the increased volatility in the U.S. stock markets, especially the extreme conditions in January, which is historically our biggest month of the quarter for furniture sales, contributed to our performance. Historically, our business has a correlation to large movements in stock prices as we believe asset valuations influence our customers’ buying patterns,” Friedman said.

Among analyst downgrades that followed the pre-announcement, KeyBanc Capital Markets downgraded Restoration Hardware shares to “sector weight” from “overweight.”

Mentioned in this article:

Anthem Inc. Nasdaq: ANTM

Chesapeake Energy Corp. NYSE: CHK

Liberty Media Corp. Nasdaq: LMCA

Restoration Hardware Holdings Inc. NYSE: RH

Spirit Capital Realty Inc. NYSE: SCR

Tesla Motors Inc. Nasdaq: TSLA

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