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RH Raises FY19 EPS Guidance on Closing of $350M Offerings

Zacks Equity Research

RH RH raised its guidance for fiscal 2019 and issued the same for the next fiscal year, as a result of closing of its 0.00% convertible notes offering for a total amount of $350 million. Moreover, this include full exercise of the $50 million over-allotment option.

Benefits of the Proceeds

As stated earlier, these proceeds will be used to lessen the burden of high-interest-bearing debt, thereby enhancing the company’s profitability. RH will retire $200 million worth of outstanding second lien debt and reduce borrowings under credit facilities.

Supported by the above-mentioned moves, the company has lifted its fiscal 2019 adjusted earnings guidance to $10.78-$11.01 per share from $10.53-$10.76 expected earlier. On a further encouraging note, the company projects a benefit of 75 cents per share to fiscal 2020 adjusted earnings.

Factors to Drive Growth

RH — a leading luxury retailer in the home furnishing space — has been exhibiting strong profitability, buoyed by its focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants and cafes) in new galleries. In fact, the company’s focus on elevating the brand and architecting an integrated operating platform helped RH in becoming a market leader with solid margin growth and higher profits, as well as generating significantly higher returns on invested capital (industry-leading ROIC was 27.8% as of fiscal 2018).

In first-half fiscal 2019, RH reported adjusted earnings growth of an impressive 53.8% on the back of a 8.9% improvement in net sales, solid margin expansion and lower adjusted effective tax rate. Adjusted operating margins in the period grew 300 bps to 13.4%.

Notably, RH is working on the betterment of the operating platform to drive growth. These initiatives include transitioning from a promotional to membership model, redesigning of its distribution center network and reverse logistics and outlet business, as well as reconceptualization of home delivery and customer experience. Over the past three years, these initiatives have helped RH to reduce costs and inventory levels, while boosting earnings and turnovers.

Going forward, the company expects these multi-year efforts to result in a dramatically improved customer experience, continued margin enhancement and significant cost savings over the next several years.

Coming to price performance, shares of RH have gained 43.2% so far this year compared with its industry’s 30.2% rally. Estimates for the current fiscal year have moved 1.8% upward over the past seven days, reflecting analysts’ optimism surrounding the company’s earnings growth potential.

RH currently holds a VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer solid investment choices.

Zacks Rank & Other Key Picks

Currently, RH sports a Zacks Rank #1. Other top-ranked stocks in the same space include Tempur Sealy International, Inc. TPX, The Lovesac Company LOVE and Williams-Sonoma, Inc. WSM, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tempur Sealy, Lovesac and Williams-Sonoma’s long-term earnings are expected to increase 15%, 40% and 9.5%, respectively.

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