U.S. Markets close in 33 mins

RH Sees Luxury Retail Bouncing Back Despite Tariffs

Dan Caplinger, The Motley Fool

Luxury home furnishings retailer RH (NYSE: RH) has gone through a lot over the course of its history. After exploding onto the scene and generating huge demand, the company went to the brink of failure before successfully reinventing itself and transforming its business model. That's helped RH to survive and thrive, but it hasn't kept it from being vulnerable to changing conditions in the luxury retail business.

Coming into Wednesday's fiscal first-quarter financial report, RH investors needed the company to prove that it could find a way to perform better regardless of the headwinds hitting its business. RH's results did indeed help give shareholders the reassurance they needed, and the luxury home furnishings specialist believes that it's generating momentum that will carry it throughout the rest of this year and beyond.

Living room set in gray and gold with chair, ottoman, shelves, and lamp.

Image source: RH.

Here's what's carrying RH higher

RH's fiscal first-quarter results showed that the company is continuing to capitalize on the opportunities it identified a while back. Revenue climbed more than 7% to $598.4 million, which was considerably better than the less-than-5% growth rate that most of those following the stock had expected to see. Adjusted net income soared 48% to $45.2 million from year-ago levels, and that translated to $1.85 per share in adjusted earnings, far outpacing the consensus forecast among investors for $1.55 per share on the bottom line.

RH identified record performance in a number of key areas. The luxury retailer's revenue figures were a record for the first quarter, and RH also pointed to record levels of operating margin and earnings per share as landmarks for the business. Especially noteworthy were RH's 3-percentage-point rise in adjusted operating margin to 11.8%, and the fact that bottom-line growth outpaced sales gains by such a large amount pointed to the success of efforts to become more efficient with its internal operations.

RH also pointed to some key highlights of the quarter. Revenue gains started to accelerate in late March, making the company optimistic that it carried even more upward momentum beyond the end of the first quarter. The key RH New York Gallery has opened to enormous success, and the company expects $100 million in annualized revenue from that store alone. Even though new projects in San Francisco and Charlotte, North Carolina, will see some delays that will result in their not opening until after the beginning of fiscal 2020, RH is optimistic that those areas will see some of the same growth that the New York market has given to the luxury home furnishings company thus far.

CEO Gary Friedman again talked about how the company's vision has paid off. "Our focus on elevating the brand and architecting an integrated operating platform," Friedman said, "continues to result in our profit model leapfrogging past the home furnishings industry." The CEO noted that RH is still one of only a handful of retailers that are managing to push revenue, margin, and earnings higher.

What's ahead for RH?

RH is a bit more upbeat about its future than it was a few months ago. As Friedman described it, he's "cautiously optimistic that business momentum will continue despite negative macro trends and increased tariffs." In particular, the introduction of the RH Beach House and RH Ski House concepts should help to foster new growth, and further investments in RH Interior Design and new galleries will also likely pay off. RH also said it has taken steps to mitigate the impact of tariffs, including selective price increases, renegotiation of product costs, and shifting supply chains out of China.

RH made a substantial increase to its guidance for the full fiscal year. Adjusted revenue is now expected to come in roughly $38 million to $58 million higher, with a new range of $2.64 billion to $2.66 billion. Adjusted earnings per share of $8.76 to $9.27 would be a roughly $0.60 to $0.70 per-share increase from its most recent prior guidance.

RH investors loved the company's upbeat views, and the stock soared more than 25% in after-market trading following the announcement. The upscale home furnishings retailer still has to keep executing well on its strategic vision, but the job RH has done to get this far has many shareholders feeling more confident than ever about its prospects.

More From The Motley Fool

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.