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Buy Surging RH Stock Before Q3 Earnings as Housing Market Play?

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Benjamin Rains
·5 min read
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RH RH, stilled called Restoration Hardware by many, has climbed 85% in the last six months to trounce the broader retail sector’s 25% climb. The high-end furniture company’s run looks even more impressive in the past three months and it stands to benefit from the counited housing market boom in the U.S.

RH is set to report its third quarter FY20 financial results on Wednesday, December 9 and it would appear that Wall Street is expecting big things, given its run.

High-End Still in Style…

RH is a high-end furniture and home décor retailer that has seen its revenue climb steadily and sometimes significantly since it went public in 2012. Customers and Wall Street have rewarded RH for its ability to adapt in the modern retail age that has seen Macy’s M, Nordstrom JWN, and department stores struggle.

RH has continued to focus on its catalogs, while also improving its e-commerce business. Plus, the firm has actually gone big at a time when many are attempting to downsize. RH has opened more massive, luxury-style stores, with accompanying bars and restaurants in major cities from Chicago to New York. RH executives also plan to expand the retailer’s international reach.

The company isn’t ready to stop there, as CEO Gary Friedman teased RH’s plans to enter the housing and hotel market in a letter to shareholders over the summer. “Our Hospitality efforts will continue to elevate the RH brand as we move beyond the four walls of our Galleries into RH Guesthouses where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion hotel industry,” Friedman wrote.

“Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences.”

 

 

 

 

 

 

 

 

 

 

Other Fundamentals

Moving on, investors should note that Warren Buffett’s Berkshire Hathaway took a position in RH last year and its bet has paid off big. More recently, RH has benefitted from a booming housing market and increased home-improvement spending that’s been driven, in large part, by the coronavirus.

U.S. home sales jumped to a 14-year high in October, which marked the fifth straight monthly increase. The recent growth has been spurred by the coronavirus and the social distancing push that has millions of Americans searching for more space. Perhaps more importantly, millennials continue to reach their prime homebuying years. This could help propel the broader housing market and adjacent industries.

RH’s Retail-Home Furnishings market, which includes Williams-Sonoma WSM, Ethan Allen ETH, and others, rests in the top 8% of our over 250 Zacks industries. RH has also outpaced giants such as Home Depot HD, Lowe’s LOW, and Target TGT over the last year and during the market’s comeback off its March lows.

The stock is up 350% in the last three years and 115% in 2020. RH has also soared by 40% in the last three months, which includes a big post-second quarter release jump. RH closed regular trading Thursday near its new records at $458 per share. Despite its run and outperformance, RH trades at a discount against its industry and its own year-long highs of around 31X forward earnings at 25X.  

RH holds a “B” grade for Value in our Style Scores system and an “A” for Growth. Zacks estimates call for RH’s Q3 revenue to climb over 24% to help lift its adjusted earnings by 90%. This would mark big growth compared to Q2’s roughly 0.5% jump.

The firm’s full-year sales are then projected to jump by 6% in FY20, which is solid considering its big Q1 decline, and another 8.5% in FY21 to reach $3.1 billion. Meanwhile, its adjusted EPS figures are expected to climb by 47% and 8%, respectively over this stretch.

 

 

 

 

 

 

 

 

 

 

 

 

Bottom Line

RH has crushed our earnings estimates over the trailing two periods and by an average of 30% during the last four quarters. RH holds a Zacks Rank #3 (Hold) at the moment, based on its earnings revisions activity. That said, it might be hard to continue to impress Wall Street, especially in the near-term.

Nonetheless, 10 out of the 14 brokerage ratings Zacks has for RH come in at a “Strong Buy.” Therefore, longer-term investors might keep their eye on the stock and think about adding RH as both a retail play and a bet on the housing market.

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