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RH Expects No Impact of China Tariffs on Upcoming Results

Zacks Equity Research

RH RH recently announced that the tariffs imposed on existing and new product categories imported from China are unlikely to materially impact results for the current and next fiscal year.

This leading luxury home furnishing retailer currently sources approximately 40% of product costs from China, and the incremental 15% tariff impact increases the risk profile. However, the company remains confident that the tariff-related headwinds will more be offset by vendor price reductions and minor price increases.

Notably, on May 10, the United States raised the list 3 tariff amount to 25% from 10% on $200 billion of Chinese imports. Most of the companies in the home furnishing/furniture industry are exposed to list 3, with minimal incremental exposure to list 4.

Notably, the United States had originally issued a 10% tariff on Sep 24, 2018 for the same $200 billion of Chinese imports, which increased input prices of many home furnishing and furniture companies.

In response to the raised China tariffs (25% on list 3), management renegotiated product costs and selectively increased prices to alleviate the impact. RH is also exploring options for shifting some of its production out of China, while searching for manufacturing opportunities in the United States.

RH’s management does not expect any impact on fiscal 2019 and 2020 results, as the additional tariffs constitute less than 1% of total inventory receipts for this fiscal year and 2% for the next.

How RH is Poised for Q2

RH is expected to report strong bottom-line growth, when it reports second-quarter fiscal 2019 (ended Aug 3) results on Sep 10 after the closing bell, buoyed by focus on improving profit margins rather than chasing for sales, backed by strength of the RH brand and business model. The company has been benefiting from higher margins and initiatives to create a new and different shopping experience with the addition of hospitality (restaurants and cafes) in new Full Line Design Galleries. These positives are expected to boost its results in the quarter to be reported.

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has increased 13.4% over the past 60 days to $2.70. This indicates an increase of 31.7% from the year-ago reported earnings of $2.05 per share. Revenues are expected to increase 8.6% year over year to $698 million (read more: RH to Report Higher Q2 Earnings on Strong Business Model).



Although shares of RH have underperformed its industry year to date, earnings estimates for fiscal 2019 have been trending upward in view of a solid start to fiscal 2019 and its raised guidance.

Recently, Williams-Sonoma Inc. WSM from the space industry space posted better-than-expected second-quarter fiscal 2019 results and lifted its fiscal 2019 earnings and revenue guidance, given strong business trend.

Zacks Rank & Other Key Picks

Currently, RH carries a Zacks Rank #1 (Strong Buy).

Other top-ranked stocks in the Retail-Wholesale sector include Tempur Sealy International, Inc. TPX and Target Corporation TGT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tempur Sealy and Target’s earnings are expected to grow 17.9% and 13.7%, respectively, in the current year.

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