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Will RH Be Able to Maintain Earnings Surprise Streak in Q4?

Zacks Equity Research

RH RH is slated to report fourth-quarter fiscal 2018 (ended Feb 2) results, after the closing bell on Mar 28.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 36.2%. Meanwhile, the company beat expectations in each of the past four quarters, the average beat being 23.5%.

Apart from beating earnings, the company surpassed revenue expectation by 0.9% in the third quarter. Its top and bottom line grew 8% and 66%, respectively, on strong pricing, higher outlet margins and continued cost benefits from a new operating platform.

How Are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts expect from the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate has been revised upward over the past 60 days to $2.87. This reflects an increase of 69.8% from year-ago earnings of $1.69. Revenues are expected to increase 2.5% year over year to $686.7 million.

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Factors at Play

RH’s efforts toward redesigning its supply chain network and rationalizing product offerings are driving revenue growth, and the trend is expected to continue in the to-be-reported quarter. However, last year’s SKU rationalization is expected to be a 1.5% drag on fourth-quarter revenues.

The company expects revenues for the quarter in the range of $680-$690 million (up 8-10% year over year).

Meanwhile, RH has been posting strong quarterly numbers, buoyed by focus on improving profit margins rather than chasing for sales. The company has been benefiting from higher margins, lower tax rate and initiatives to create a new and different shopping experience with the addition of hospitality (restaurants and cafes) in new Full Line Design Galleries. This is evident from its adjusted earnings growth of 272% to $5.58 per share on 3.7% revenue growth during the first nine months of fiscal 2018. The company’s adjusted operating margin improved 540 basis points year over year to 10.8% in the same period. Its effective tax rate was 14.1% in the said period compared with 35.4% in the corresponding quarter of 2017.

Meanwhile, RH is working on cost-saving initiatives such as redesigning its supply chain, reducing inventory, improving product margins and so on. These helped the company report stellar gross and operating margins in the last quarter. The upside was mainly driven by expansion in product margins, lower SG&A (selling, general and administrative) expenses as well as reduced effective tax rate.

For the to-be-reported quarter, the company expects adjusted gross margin in the band of 39.5-40% versus 38.5% in the year-ago quarter. Adjusted operating margin is projected in the range of 14.8-15.3% compared with 11.2% reported in the year-ago quarter. Adjusted SG&A expenses, as a percentage of revenues, are expected in the 24.6-24.8% band.

Overall, fiscal fourth-quarter earnings per share are projected to grow between $2.75 and $2.90.

What Does the Zacks Model Unveil?

RH does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: RH has an Earnings ESP of 0.00%.

Zacks Rank: RH currently carries a Zacks Rank #1 (Strong Buy), which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks Worth a Look

Here are couple of stocks in the Zacks Retail-Wholesale sector, which have the right combination of elements to beat estimates in their respective quarters to be reported.

MarineMax, Inc. HZO has an Earnings ESP of +16.67% and a Zacks Rank #2.

Dave & Buster's Entertainment, Inc. PLAY has an Earnings ESP of +1.32% and a Zacks Rank #3.

Peer Release

Williams-Sonoma Inc.’s WSM earnings and revenues beat the Zacks Consensus Estimate by 6.6% and 2.2%, respectively, in fourth-quarter fiscal 2018.

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