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Restoration Hardware (RH) Down 19.7% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Restoration Hardware (RH). Shares have lost about 19.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Restoration Hardware due for a breakout? 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 catalysts.

RH's Q4 Earnings Beat Estimates, Revenues Lag

Earnings, Revenues & Margin Discussion

RH’s fourth-quarter adjusted earnings of $3.00 per share surpassed the Zacks Consensus Estimate of $2.83 by 6%. The reported figure surged a notable 78% from the year-ago level and came ahead of its guided range of $2.75-$2.90 per share.

Adjusted revenues (including recall accrual) of $671.8 million missed the consensus mark of $687 million by 2.2%. Nonetheless, the said figure increased marginally from the year-ago level of $669.7 million. RH’s comparable brand revenue (comps) growth was 5% year over year compared with a 4% increase in the fiscal third quarter and 2% improvement in the prior-year quarter.

The company’s adjusted operating margin expanded 470 bps to 15.9% year over year.

Store Update

As of Feb 2, 2019, RH operated 86 retail galleries. These include four new design galleries and four new RH Modern Galleries. It closed five existing stores during fiscal 2019, which includes closing of four legacy galleries and one Waterworks Scottsdale Showroom. The company also opened eight stores in fiscal 2019. RH operated 83 retail galleries a year ago.

Balance Sheet

RH’s cash and cash equivalents were $5.8 million as of Feb 2, 2019 compared with $17.9 million on Feb 3, 2018. The company ended fiscal fourth quarter with merchandise inventories worth $531.9 million compared with $527 million as of Feb 3, 2018. Moreover, net cash provided by operating activities were $300.6 million, below $556.8 million a year ago.

Fiscal 2018 Highlights

Adjusted earnings per share came in at $8.54, up an impressive 180% from the year-ago level of $3.05. The upside was mainly backed by significant growth in operating margin and lower adjusted effective tax rate of 16.9%.

Adjusted revenues increased 5% year over year to $2.51 billion. RH’s comps growth was 4% year over year compared with a 6% increase in the prior-year period.

Adjusted gross margin was 40.1%, expanding 500 bps from the year-ago level. Adjusted operating margins also grew 510 bps to 12.1% in the same period.

Fiscal First-Quarter Guidance

For first-quarter fiscal 2019, revenues are projected in the range of $583-$588 million, reflecting an increase of 4-5% year over year.

Adjusted gross margin is projected in the band of 38.6-38.9%. Adjusted operating margin is expected in the range of 10-10.6%.

Adjusted SG&A, as a percentage of revenues, is estimated in the 28.5-28.2% range. Adjusted earnings per share are projected within $1.47-$1.58. The Zacks Consensus Estimate for the fiscal first quarter is pegged at $1.79, which might witness a downward revision in the coming days.

Full-Year Fiscal 2019 Guidance

Post fourth-quarter fiscal 2018 results, RH has been facing weakness in core business due to market volatility. Continued softness in the housing market over the last few quarters, and its ongoing exit from unprofitable and non-strategic businesses are affecting profitability. Consequently, it trimmed its previously announced guidance for fiscal 2019. In fact, the current guided range is below market expectations due to the above-mentioned headwinds.

Adjusted net revenues are expected in the range of $2.585-$2.635 million, which is below the consensus mark of $2.76 (considering the midpoint of the guided range) and lower than the earlier guided range of $2.72-$2.82 billion. The midpoint of the guided range was 6 points below the earlier expectation. The guidance reflects an increase of 3-5% year over year.

Adjusted operating margin is expected in the range of 12.7-13.3%. Adjusted earnings per share are projected between $8.41 and $9.08, below the prior guided range of $9.30-$10.70 and the consensus estimate of $9.90.

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

The company has plans to open five to seven new galleries in fiscal 2019, up from average of three to five galleries in a 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 -13.68% due to these changes.

VGM Scores

Currently, Restoration Hardware has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 this revision looks promising. Notably, Restoration Hardware has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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