BofA: Another Beat And Raise
RH reported a typical beat and raise quarter as results were "much stronger" than expected, Bank of America analyst Curtis Nagle said. The company outperformed versus expectations across multiple metrics, including operating income, core sales, growth, and free cash flow.
"We reiterate our Buy rating as believe that ex a major macro event (such as the stock market downturn last year), RH's core business should continue to outperform and drive operating earnings and free cash flow upside," the analyst wrote in a note.
Wells Fargo: Key Takeaways
RH's second quarter is highlighted by a few key takeaways, Wells Fargo analyst Zachary Fadem wrote in a note. These include:
- Sales in California alone could almost double from $450 million today to $700 million-$800 million.
- International sales could be up to four times the size of North America.
- Outlet inventory is 75% less today than it was 18 months ago.
- Gross margins could move higher in the back half of the year from business exits.
- 80% of back half 2019 advertising expense could come in the third quarter.
Related Link: RH Analysts Raise Estimates After Q1 Beat-And-Raise
RH will open one new Design Gallery in the third quarter, another two units in the fourth quarter, another seven in 2020 and seven more the year after, Stifel analyst John Baugh said. The company hasn't opened a new store since New York and Yountville California in late 2018 so new stores should help drive sales growth.
"We are impressed with the changes the company has made and the results they have generated," Baugh wrote.
Management provided revenue guidance that implies sales growth of up to 6% in the back half of 2019, which does mark a slowdown from 8.8% growth in the first half of the year, Wedbush analyst Seth Basham said. RH's guidance factors a revenue reduction from exiting unprofitable and non-strategic business. The guidance also reflects uncertain macro economic trends, including a slowdown in luxury home sales.
SunTrust: Lower Valuation Needed
RH's second quarter and strong outlook makes the case for the company tripling revenue as new galleries can increase market-level sales by 50% to 300%, KeyBanc Capital Markets analyst Bradley Thomas said. A reasonable outlook calls for the company to oversee 70 domestic stores and more overseas and generate more than $5 billion in revenue and earn $20 in EPS.
The company's near-term picture isn't as encouraging, however, especially within a challenging environment for the home furnishing industry.
"We believe investors with a 6-12-month horizon may prefer a lower valuation, considering elevated competition in the industry," Thomas wrote.
Ratings And Price Targets
- Wells Fargo maintains at Outperform, price target lifted from $150 to $175.
- BofA maintains at Buy, price target lifted from $165 to $175.
- Stifel maintains at Buy, price target lifted from $153 to $196.
- Wedbush maintains at Outperform, price target lifted from $160 to $170.
- KeyBanc Capital Markets maintains at Sector Weight.
RH's stock traded higher by 5.7% to $167.76 per share at time of publication.
Few if any retailers face as large as an opportunity as RH does. However, the stock is up more than six-fold since early 2017 which may already factor in a large portion of its outlook.
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