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RH to Report Higher Q2 Earnings on Strong Business Model

Zacks Equity Research

RH’s RH earnings and revenues are expected to increase on a year-over-year basis when it reports second-quarter fiscal 2019 (ended Aug 3) results.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 20.1%. Markedly, the company beat expectations in each of the last four quarters, with the average being 20.1%.

Meanwhile, it topped    revenue expectation by 2.7% in the fiscal first quarter. Also, its adjusted earnings and revenues (including recall accrual) grew 53% and 7.4%, respectively, from the year-ago level.

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 RH prior to the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share (EPS) has increased 13.9% 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.

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Factors at Play

RH has been reporting strong bottom-line growth, buoyed by focus on improving profit margins rather than chasing for sales. The trend is likely to be reflected in the to-be-reported quarter as well, backed by strength of its 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.

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. This is likely to serve as a headwind in the quarter to be reported. Weakness in the core business due to market volatility (although it is likely to be less in the second quarter), continued softness in the housing market over the last few quarters, and the ongoing exit from unprofitable and non-strategic businesses will likely impact RH’s revenues in the to-be-reported quarter.

Nonetheless, despite a soft sales environment, RH’s promotional activity, increased pricing activities, spring sale and a modest uptick in discounts at limited outlet stores are expected to offset the aforementioned headwinds to some extent. Consequently, the company recently increased its guidance for the second quarter and full year of fiscal 2019.

Overall, the company expects revenues for the quarter in the range of $696-$699 million, indicating 8-9% year-over-year increase.

Meanwhile, RH 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 buoy the upcoming results. However, increased shipping and labor costs may partially restrict its margin improvement. Meanwhile, increased pricing activities are likely to offset higher product costs from Chinese tariffs.

For the to-be-reported quarter, the company expects adjusted EPS in the band of $2.65-$2.72 (suggesting 40-44% year-over-year growth) versus the previous expectation of $2.33-$2.47. Free cash flow for the quarter is projected at approximately $95 million (implying a rise from $25 million reported last year).

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 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.

Notably, 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 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.

Dollar Tree, Inc. DLTR has an Earnings ESP of +7.91% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General Corporation DG has an Earnings ESP of +2.64% and a Zacks Rank #3.

Costco Wholesale Corporation COST has an Earnings ESP of +0.30% and a Zacks Rank #3

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