Dive Brief:

• Shares of Restoration Hardware rose some 8% late Tuesday after the home furnishings retailer reported fourth quarter results that topped Wall Street forecasts.

• RH said that Q4 same-store sales fell 18% compared to a 9% increase last year, while Q4 GAAP net revenues were $586.7 million, down 9% from $647.2 million in the year-ago period and topping FactSet expectations for $584.2 million cited by MarketWatch.

• For the full fiscal year, RH said that GAAP and adjusted net revenues increased 1% on top of a 13% increase last year, while same-store sales fell 7% compared to an 11% increase last year. Full-year GAAP net income was $5.4 million, compared to $91.1 million last year, and adjusted net income was $51.8 million, compared to $114.8 million last year.

Dive Insight:

Restoration Hardware has been beset by inventory woes and some confusion around changes to its markdown strategy, putting in jeopardy its previously successful turnaround, based on a physical store strategy and mailings of its thick print catalog. The retailer is also betting on an upscale restaurant play in key urban areas, which prompted a lawsuit against Crate & Barrel over the hiring of executives who it alleges had knowledge of those plans and were using that in their new jobs. 

In his statement Tuesday, CEO Gary Friedman defended the retailer’s new and much-criticized membership model, a pay-to-play scheme for its RH Grey Card loyalty program in lieu of offering sale prices. For a $100 a year, customers enjoy 25% off in all departments, 10% off clearance items, complimentary interior design services, early access to clearance events and lower interest rates on the RH credit card. Perks don’t include free shipping, however. Moreover, the membership model is a proven but likely oversaturated one, Profitero VP of strategy and insights Keith Anderson has told Retail Dive. 

“While 2016 was a year of transformation and transition, 2017 will be a year of execution, architecture, and cash flow at RH," Friedman said in a statement. "Our focus will be on executing our new business model, architecting a new back-end operating platform, and maximizing cash flow." 

Friedman said Restoration Hardware will limit new Gallery openings to between three and five per year, reducing capital requirements and execution risk. “We expect first quarter fiscal 2017 net revenues to increase 16% to 20%, of which approximately 5 points of growth is due to the acquisition of Waterworks and 5 points is related to higher outlet and warehouse sales stemming from accelerated inventory optimization efforts during the quarter," Friedman said. "Excluding these factors, we are expecting growth in the range of 6% to 10%, as we anniversary the launch of the RH Members Program, and benefit from the mailing of our Fall 2016 RH Interiors Source Book and the recent mailing of RH Outdoor."

Friedman also touted a "cautiously optimistic approach" to Restoration Hardware's fiscal 2017 outlook, projecting a total net revenue increase of 8% to 12%, while adjusted net income is expected to rise 26% to 55%. "We plan to generate meaningful free cash flow driven by increased earnings, reduced capital spending and lower inventories,” Friedman added.