RH's Early Insight Looks Good
No-moat RH (RH) offered early insight to its third-quarter results and a look ahead at both its fourth-quarter and 2018 expectations ahead of its investor day on Nov. 16. Third-quarter top-line results were better than our model by 2 percentage points, rising 8% to $592 million (just above the $575 million-$590 million range the company forecast), despite an approximate 1% hit from weather events. The bottom line handily exceeded our implied earnings of about $0.80, now anticipated to come in around $1.02-$1.04, which includes $0.11 of upside from tax benefits (net-net inferring about $0.10 of outperformance). The real surprise relative to our model comes from the profitability side ahead, as both top-line expectations for the fourth quarter and 2018 at between $655 million-$680 million and $2.58 billion-$2.62 billion, respectively, are largely in line with our estimates. Our forecast previously called for revenue of $664 million in the fourth quarter and $2.69 billion in 2018.
On the profit side, the company anticipates adjusted operating margins of 9%-10% in 2018, well ahead of our 7% forecast. In our opinion, an increasingly competitive home furnishing landscape underlies slower margin expansion, and we plan to hear management’s commentary surrounding the business’ operating profile before making final changes to our model. With a slimmer distribution profile (the Los Angeles DC has closed, and Dallas is next to be shuttered) RH is set to save approximately $15 million annually. Improvements surrounding the logistics of the outlet business are set to capture another $15 million-$20 million, which when combined with the DC savings should amount to about 5% of SG&A costs. At first blush, and after adding updated information into our forecast, we could estimate a 5%-10% increase to our $53 fair value estimate (although we will wait to hear a full assessment from the investor day to finalize our model) and still view shares as overvalued.
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