Restoration: Why its retail's undeserving casualty

John Jannarone

Just two weeks into 2014, retailer stocks have already had a bruising. One that may have taken some unfair hits: upscale furniture retailer Restoration Hardware.

There's good reason to be wary of retailers after several major companies in the sector have warned of a weak holiday season. Shares of Pier 1 Imports, for instance, have dropped 12 percent since Jan. 8 on news that slow customer traffic caused disappointing December sales.

Similarly, shares of Bed Bath & Beyond have fallen 16 percent since it lowered earnings guidance on Jan. 8. And while Restoration hasn't yet reported on its recent performance, its shares have already slipped 15 percent since the start of the year.

Restoration Hardware display from the company's website.
Source: Restoration Hardware

That could spell opportunity for investors who recognize Restoration's key advantages. First, short-term issues like wintry weather in December probably didn't hurt Restoration as much as other retailers.

Matt Nemer, an analyst at Wells Fargo, points out that Restoration's store base is more concentrated on the West Coast than the Northeast or Midwest where conditions were worst. The company also generates about half its sales online, so many customers could have placed orders without even leaving their homes.

(Read more: No coal here! Retail's holiday winners)

And while many retailers have resorted to discounting to clear inventory in recent weeks, Restoration will feel less pressure because it has a unique set of merchandise. Restoration also sells items in a price bracket that's higher than other large retailers like Williams-Sonoma's Pottery Barn, so there's less need to respond to promotions by rivals.

(Read more: So go retail stocks, so goes the market?)

In the longer term, Restoration is also well-prepared for the inevitable shift toward online shopping. The trouble for many retailers is maintaining sales at physical locations with high overheard while also shouldering shipping costs for online orders.

But Restoration already has shifted to a "showroom" model where it displays a wide selection of merchandise in very large spaces and delivers the vast majority of purchases from separate locations. That has allowed it to introduce far more products quickly and give shoppers a chance to see them in person.

(Read more: Best Buy shares plunge on weak holiday report)

Can brick & mortars compete with e-commerce?
Can brick & mortars compete with e-commerce?

Indeed, the showroom approach has contributed to some of the fastest sales growth in retail. Analysts expect comparable-store sales growth of 29 percent in the fiscal year through January, according to FactSet.

Of course, comparable-store sales growth is bound to moderate over time. But there is plenty of scope to continue adding new large-format stores in the next few years. Analysts expect square footage to increase 12 percent in fiscal 2014 and 39 percent the following year.

What's more, the company is likely to get highly favorable deals on leases on many of those larger stores because it will have the support of malls that want to attract Restoration's high-end customers. In the past, department stores like Macy's and J.C. Penney have enjoyed such "anchor tenant" status that Restoration has already begun to negotiate.

(Read more: 5 problems retailers must fix in 2014)

All that suggests the company can continue to drive earnings growth of at least 20 percent for the next few years, making its forward earnings multiple of 26 times look justified. As with any high-multiple stock, there are likely to be a few bumps along the way. But Restoration investors who stay the course should wind up sitting pretty.

—By CNBC's John Jannarone. Follow him on Twitter @jannarone.