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RH Gearing Up to Report Q3 Earnings: What's in the Offing?

Zacks Equity Research

RH RH is scheduled to report third-quarter fiscal 2019 (ended Nov 2) results on Dec 4, after the closing bell.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 18.5%. Markedly, the company beat earnings expectations in each of the last four quarters, with the average being 20.2%. Meanwhile, it topped revenue expectation by 1.2% in the fiscal second quarter. Notably, the company’s revenues beat analysts’ expectations in three of the trailing four quarters.

In the fiscal second quarter, its adjusted earnings and revenues (including recall accrual) grew 59% and 9.9%, respectively, from the year-ago level.

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Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has been unchanged at $2.21 over the past 30 days. The estimated figure indicates an increase of 27.8% from $1.73 per share reported in the year-ago quarter. The consensus mark for revenues is pegged at $675.6 million, suggesting 5.8% improvement from the year-ago reported figure of $638.5 million.

Factors to Note

RH is expected to have generated strong earnings growth in the fiscal third quarter, buoyed by focus on improving profit margins rather than chasing for sales. The company has been benefiting from strength of the RH brand and business model, along with 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.

That said, some macroeconomic/geopolitical concerns — which comprise high-end housing slowdown in the United States and U.S.-China trade spat — persist. Luxury home sales slowed down in recent times as homes in high-tax areas of the state are facing a decreasing number of potential buyers, given the material loss of deductions under Trump’s new tax plan. Weakness in the core business due to market volatility (although it is likely to have been less in the fiscal third quarter), and the ongoing exit from unprofitable and non-strategic businesses are likely to have affected RH’s revenues in the to-be-reported quarter. Overall, the company expects revenue growth rate to decelerate for the fiscal third and fourth quarters to 5-6% from more than 8% in the first half of 2019.

Nonetheless, despite a soft sales environment, RH’s promotional activity, increased pricing activities and a modest uptick in discounts at limited outlet stores are expected to have offset the aforementioned headwinds to some extent. That said, higher advertising costs are anticipated to have weighed on its margin in the fiscal third quarter. The company had earlier stated that 80% of advertising costs are expected to hurt RH in the fiscal third quarter.

Meanwhile, the company has been working on cost-saving initiatives such as redesigning the supply chain, reducing inventory, improving product margins and so on. These factors are expected to reflect on the to-be-reported quarter. However, increased shipping and labor costs may have partially restricted its margin improvement. Meanwhile, increased pricing activities are likely to have offset higher product costs from China tariffs.

What the Zacks Model Unveils

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: The company has an Earnings ESP of -1.90%.

Zacks Rank: RH currently carries a Zacks Rank #2 (Buy).

Stocks Worth a Look

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

Costco COST has an Earnings ESP of +1.01% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar General DG has an Earnings ESP of +0.65% and a Zacks Rank #2.

Big Lots BIG has an Earnings ESP of +3.85% and a Zacks Rank #3.

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