“To management’s credit, this is becoming a common theme, as earnings have surprised to the upside multiple times this year,” Raymond James analysts Bobby Griffin and Budd Bugatch wrote in a report. “Despite a challenging environment for residential furniture (no resolution to China tariffs), RH continues to deliver best-in-class results, thereby illustrating the strength of the RH brand and business model CEO Friedman and his team have built up over the last few years.”
RH Earnings Analysis
RH reported an adjusted $2.79 bottom line on a lower-than-expected tax rate and 44% year-over-year growth in earnings before interest and tax (EBIT). Gross margins expanded 180 basis points to 41.7% as price increases drove positive product margins. Sales grew 6%, driven largely by outlet sales and RH New York.
“While we had hoped for stronger topline performance (which once again benefitted from 2pts of outlet growth), RH’s profit improvement is undeniable during a time where most retailers are struggling to keep margins flat,” Wells Fargo analyst Zachary Fadem wrote.
Selling, General and Administrative expenses (SG&A) also beat expectations and contributed 2 cents per share to the bottom line.
“Yet, we don’t think it's realistic for it to keep its operating expenses flattish moving forward,” UBS analyst Michael Lasser wrote. “It has big aspirations. This will require investment. Assuming it can continue to raise its margins through higher prices, it will provide firepower to make the investments.”
See Also: RH CEO Talks Berkshire, Apple And China On 'Mad Money'
RH Guidance Reactions
RH anticipates fourth-quarter operating-margin growth on 5% to 6% sales growth. In 2020, it expects RH Ski House, new Gallery launches and RH Color to drive 8% to 12% revenue growth and a 200-basis-point expansion in EBIT margins.
“It would seem that the bulk of RH’s growth is going to come through sizable space expansion, rather than same-store sales growth,” Lasser wrote. “This will probably translate to a multiple that is capped even with RH’s expectation that it can achieve a 20% OM over time. The market’s likely to question if this is sustainable in the absence of SSS growth.”
In the near term, though, the Street likes RH’s prospects.
“We believe upside potential likely remains should the macro/housing environment remain intact and higher-end consumer remains undeterred by tariffs,” Fadem wrote.
RH Big Picture Focuses
RH offered color on its international expansion plan, which Bank of America did not include in its model but said should not be underestimated.
“With leverage continuing to fall and our view that RH will very likely finance its convertible debt coming due in 2020, we see additional EPS upside on top of strong operating results,” Curtis Nagle wrote in a report.
- Bank of America Merrill Lynch maintained a Buy rating and raised its price target from $228 to $235;
- KeyBanc Capital Markets maintained a Sector Weight rating;
- Raymond James maintained a Market Perform rating;
- UBS maintained a Neutral rating but raised its target from $160 to $210; and
- Wells Fargo maintained an Outperform rating with a $230 target.
“We continue to view RH as a compelling long-term growth story, but recommend investors stay selective and opportunistic in the highly competitive furniture/ furnishings industry,” KeyBanc analysts wrote.
UBS suspects the stock has already baked in any earnings-estimate increases. While concerned about tariff headwinds, Raymond James noted it would become more bullish on the stock “on any notable pullback.”
Photo by Restoration Hardware via Wikimedia.
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