Shares of Restoration Hardware soared more than 40 percent Thursday, a day after the home furnishing retailer's owner reported earnings that beat analysts' estimates.
RH also raised its outlook for the full year, anticipating better sales following a transition from what it calls "a promotional to a membership model." The RH Members Program, launched a year ago, offers a 25 percent discount on all RH items for a yearly fee of $100.
"We believe that membership has eliminated the frantic buying patterns and associated returns, exchanges, and canceled orders that are the result of a chaotic promotional model," CEO Gary Friedman said in a statement.
RH announced on Wednesday afternoon second-quarter adjusted earnings-per-share of 65 cents on revenue of $615.3 million. The Street was calling for adjusted earnings of 47 cents a share on sales of $606 million, according to a survey of analysts by Thomson Reuters.
Same-store sales — a metric closely monitored for retail stocks — were up 7 percent for the latest period, topping a Street forecast that called for 5.4 percent growth.
RH raised its full-year profit forecast to a range of $2.43 to $2.67 per share, up from its prior forecast of $1.67 to $1.94 a share. The retailer also said it anticipates generating free cash flow of roughly $400 million by the end of the year.
"While 2016 was a year of transformation and transition, 2017 will be a year of execution, architecture, and cash at RH," Friedman said. "The transformation of our real estate has the potential to double our retail sales in every market."
In an attempt to keep its store fleet fresh and appealing to younger shoppers, RH has created "Design Galleries," offering food and beverages for purchase, alongside its luxury furniture. The company says it's an experience that "cannot be replicated online."
RH's next three gallery locations are set to open in Toronto, New York and Palm Beach, Florida.
The furniture retailer's "against the grain strategy" is paying off, Gordon Haskett analyst Chuck Grom wrote in a note to clients. In fact, Grom said he believes RH's higher guidance "looks a touch conservative."
With a more "classic focus" in stores, moving away from contemporary, "the [RH] model now has a tremendous amount of torque that could drive significant EPS upside, particularly if sales come in better than expected," Grom said.
He has raised his price target on RH shares to $72. With a session rise of 43 percent, it was trading at $70.69 on Thursday afternoon.
Out of all the home furnishing brands, RH's stock is the second-most shorted on the market, falling only behind Williams-Sonoma. Short selling involves selling an asset that a trader doesn't directly own, betting on a drop in its price, and then buying the asset back to make a profit.
Should that stock price start to climb, though, short sellers want out and start to buy, consequentially sending shares higher. It's a process known as covering.
Steep debt levels have spooked some investors of late, but Friedman took time on a recent call with analysts and investors to "address any concerns about [RH's] balance sheet and debt ratios." Promising $400 million in free cash flow should calm some fears, the CEO believes.
With Thursday's tremendous gains, RH shares have climbed a whopping 126 percent in 2017.