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4 Factors That Underscore RH's Impressive Growth Prospects

Zacks Equity Research

Strong growth initiatives, returns-focused plan along with an aggressive share repurchase strategy bode well for RH RH. Consequently, shares of the company have gained 24.5% in the past year against its industry’s decline of 21.2%. The solid price performance was backed by strong earnings surprise history of the company, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with average of 23.5%.



Meanwhile, earnings estimates for fiscal 2019 and 2020 have moved up 1.1% and 4.3%, respectively, over the past 30 days. Its new business model coupled with several growth initiatives are expected to drive the stock higher.

Let us delve deeper into the factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick.

Strong Performance, Upbeat View: RH has been reporting solid top-line numbers over the last few quarters. In fact, its net sales grew 3.7% and gross margin expanded 680 basis points (bps) in the first nine months of fiscal 2018. Further, adjusted earnings exhibited significant 272% growth from the prior-year level during the same period.

The solid performance was mainly driven by its focus on improving profit margins rather than sales. Notably, the demand for its products is related to the performance of the broader housing market. Improving economy, wage growth, declining unemployment levels as well as regaining consumer confidence bode well for housing sector’s performance, thereby driving RH’s growth.

On the back of the above-mentioned positives, the company has raised its full-year 2018 guidance. The company now expects net revenues in the 2.519-$2.529 billion range, representing 5% year-over-year growth (versus 4-5% improvement projected earlier). Adjusted gross margin is now projected in the 40.1-40.3% range (versus 40-40.2% expected earlier).

Adjusted SG&A, as a percentage of revenues, is likely to lie in the range of 28.2-28.3% compared with 28.6-28.7% projected earlier. Resultantly, adjusted operating margin will now be in the 11.9-12% band, up from previous expectation of 11.2-11.7%.

Importantly, adjusted earnings per share are expected in the $8.33-$8.47 range (earlier expectation was $7.35-$7.75).

Margin Expansion Plans: In the last three quarters, sales have remained subdued due to its focus on expanding earnings and operating margins. In fact, gross margins expanded a significant 690 bps in the said period. Moreover, the company has plans to increase assortments in key categories and accelerate the introduction of new collections.

Initiatives like RH Modern, RH Teen, RH Hospitality, the redesign of RH Interiors Source Book and the rollout of Design Ateliers across the company’s retail galleries are expected to drive growth in 2019 and beyond.

RH has been redesigning its organization and has closed an additional 500,000 square foot distribution center facility. The company has been lowering construction costs to achieve $28 million of annualized net savings in the fourth quarter of 2018. RH also issued new long-term targets of 8-12% average annual revenue growth, mid- to high-teens operating margins, 15-20% average annual earnings growth and pretax ROIC of more than 50%.

Share Buyback Program: The company bought back 20.2 million shares of its common stock in fiscal 2017, following its aggressive share repurchase strategy. In October 2018, the company approved a new $700-million share repurchase program, of which, it has repurchased approximately 1.2 million shares in the fiscal third quarter. Such activities raise optimism among investors and boost their confidence in the stock.

Solid VGM Score: It has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer solid investment choices.

Other Key Picks

Other top-ranked stocks in the Retail-Wholesale sector include Darden Restaurants, Inc. DRI, El Pollo Loco Holdings, Inc. LOCO and Noodles & Company NDLS, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Darden, El Pollo Loco, and Noodles & Company’ earnings for the current year are expected to increase 18.3%, 14.3% and 300%, respectively.

Zacks' Top 10 Stocks for 2019

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