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Restoration Hardware (RH) Up 10.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Restoration Hardware (RH). Shares have added about 10.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Restoration Hardware due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

RH’s Q1 Earnings & Revenues Beat Estimates, View Up

RH reported stellar first-quarter fiscal 2019 results, wherein adjusted earnings and revenues surpassed analysts’ expectations. Notably, it took measures to mitigate the effects of the U.S.-China trade dispute and expects that tariffs will not impact the company’s ability to achieve financial goals in the long run.

Earnings, Revenues & Margin Discussion

RH’s first-quarter adjusted earnings of $1.85 per share surpassed the Zacks Consensus Estimate of $1.54 by 20.1%. Moreover, the reported figure surged a notable 53% from the year-ago level and came well ahead of its guided range of $1.47-$1.58 per share.

Adjusted revenues (including recall accrual) of $598.8 million topped the consensus mark of $583 million by 2.7%. The said figure also increased 7.4% from the year-ago figure of $557.4 million.

Despite adverse macro trends and higher tariffs, revenues grew year over year aided by the recent introduction of the RH Beach House, continued elevation and expansion of its product offerings, investments in RH Interior Design, launch of the RH Ski House, along with new galleries opening this fall.

The company’s adjusted operating margin came in at 11.8%, expanding 300 bps year over year. Adjusted EBITDA also grew 25.7% year over year to $100.4 million in the quarter.

Store Update

As of May 4, 2019, RH operated 70 retail galleries. These include 43 Legacy Galleries, 20 Design Galleries, five Baby & Child Galleries and two Modern Galleries. As of May 4, 2019, six of its RH Design Galleries included an integrated RH Hospitality experience. RH operated 69 retail galleries a year ago.

Balance Sheet

RH’s cash and cash equivalents were $102.6 million as of May 4, 2019 compared with $5.8 million on Feb 2, 2019. The company ended the fiscal first quarter with merchandise inventories worth $530.2 million compared with $531.9 million as of Feb 2, 2019. Net cash provided by operating activities was $38.6 million compared with $3.2 million of net cash used for operating activities a year ago.

Fiscal Second-Quarter Guidance

For second-quarter fiscal 2019, revenues are projected in the range of $681-$688 million, indicating an increase of 6-7% year over year.

Adjusted gross margin is projected in the band of 41.1-41.4%. Adjusted operating margin is expected in the range of 12.5-12.9%.

Adjusted SG&A, as a percentage of revenues, is estimated in the 28.6-28.5% range. Adjusted earnings per share are projected within $2.33-$2.47,suggesting year-over-year growth of 24-31%.

Full-Year Fiscal 2019 Guidance

In view of a stellar start to fiscal 2019, RH raised its full-year guidance for net revenues, adjusted operating income, adjusted operating margin and adjusted earnings. The company’s focus on elevating the brand and architecting an integrated operating platform continues to reflect in its profit model leapfrogging past the home furnishings industry.

Adjusted net revenues are now expected in the range of $2,642.8-$2,662.8 million versus $2,585-$2,635 million projected earlier. The guided range is higher than the consensus estimate of $2,605 million.

Adjusted gross margin is projected in the band of 40.5-40.8%.

Adjusted operating margin is now expected in the range of 12.6-13.2% (versus 12-12.6% expected earlier). Adjusted earnings per share are projected between $8.76 and $9.27, above the prior guided range of $8.05-$8.69 and the consensus estimate of $8.33.

However, the company has reiterated long-term targets, as earnings potential and capital efficiency of the new operating model continue to evolve. It continues to expect long-term revenue growth of 8-12% and earnings improvement of 15-20% on an annual basis.

Moreover, the company expects to accelerate real estate transformation to a rate of five-seven new galleries in fiscal 2020 and a minimum of seven new galleries in fiscal 2021. Again, RH is on track to achieve planned asset sales of $50-$60 million during this fiscal year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 9.17% due to these changes.

VGM Scores

Currently, Restoration Hardware has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Restoration Hardware has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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