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RH Q4 Earnings Beat Estimates, Membership Model Bodes Well

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RH RH posted strong fourth-quarter 2017 results, with shares gaining a solid 14.7% during after-hours trading. The new membership model — RH Members Program — is improving its brand image, streamlining operations and enhancing customer experience. The company’s efforts to redesign its supply chain network and rationalize product offerings bode well.

RH reported fourth-quarter fiscal 2017 earnings per share of $1.69, surging 149% from the prior-year quarter. Also, earnings surpassed the Zacks Consensus Estimate of $1.56 by 8.3%.

Revenues increased 14% to $670.3 million but missed the consensus mark of $671.5 million. RH’s comparable brand revenues inched up 2% year over year, against 18% decline in the prior-year quarter. The company’s direct revenues rose10%, while store revenues increased 18% from the year-earlier quarter.

Margins

Adjusted operating income of $75.1 million in the reported quarter improved from the prior-year quarter’s figure of $50.9 million. Adjusted operating margin expanded 26 basis points (bps) to 11.2%. Adjusted gross profit was $257.5 million, up 25.9% year over year. Adjusted gross margin improved 390 bps to 38.5%.

Store Update

As of Feb 3, 2018, RH operated 84 retail galleries, slightly lower than 85 in the prior-year quarter. These include 47 legacy galleries, six large format galleries, 10 next generation design galleries, one RH Modern Gallery and four Baby & Child galleries in the United States and Canada, respectively, along with 15 Waterworks showrooms in the United States and the U.K.

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Fiscal 2017 Highlights

Revenues increased 14% to $2.44 billion and adjusted diluted earnings per share of $3.05 surged 140% year over year.

Balance Sheet

RH had cash and cash equivalents of $17.9 million as on Feb 3, 2018, compared with $87 million as on Jan 28, 2017. The company ended the quarter with merchandise inventories worth $527 million, compared with $752.3 million as on Jan 28, 2017.

First-Quarter Outlook

Revenues are projected in the range of $555-$565 million.

Adjusted gross margin is projected in the band of 36.4-36.8%. Adjusted operating margin is expected in the range of 7.6-8.1%.

Adjusted SG&A, as a percentage of revenues, is expected in the 28.7-28.8% range.

Adjusted earnings per share are projected between 95 cents to $1.05.

Fiscal 2018 Outlook

Net revenues are expected in the $2.53-$2.57 billion range, representing growth of 5-7%.

Adjusted gross margin is projected in the 37.7-38.5% range, while adjusted operating margin is expected in the 9.2-10.2% band, up from the previous estimate of 9-10%.

Adjusted SG&A, as a percentage of revenues, is expected in the 28.3-28.5% range.

Adjusted earnings per share are expected in the $5.45-$6.20 range.

Free cash flow is projected in excess of $250 million, up from the previous estimate of $240 million.

Zacks Rank & Other Key Picks

RH carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the Zacks Retail-Wholesale sector include The Gap, Inc. GPS, Nordstrom, Inc. JWN and Boot Barn Holdings, Inc. BOOT.

All the companies carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Gap is likely to witness 23.5% earnings growth in fiscal 2018.

Fiscal 2018 earnings for Nordstrom are expected to increase 15.5%.

Boot Barn Holdings is expected to see 27.3% growth in fiscal 2018 earnings.

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