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Will RH's Pricing Power Combat Slower Demand in Q1 Earnings?

Zacks Equity Research

RH RH is slated to report first-quarter fiscal 2019 (ended May 4) results on Jun 12, after the closing bell.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 6%. Markedly, the company beat expectations in each of the last four quarters, with the average being 22.9%.

Meanwhile, it missed revenue expectation by 2.2% in the last reported quarter. Nonetheless, its adjusted earnings and revenues ((including recall accrual) grew 78% and 0.3%, 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 has remained unchanged over the past 60 days at $1.54. This indicates an increase of 15.8% from the year-ago reported earnings of $1.33 per share. Revenues are expected to increase 4.6% year over year to $583 million.

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Factors at Play

Luxury home sales slowed down in the first quarter than the fourth quarter of last year. Luxury homes in high-tax areas of the state are faced with a decreasing number of potential buyers but an increase in potential sellers, given the material loss of deductions under Trump’s new tax plan. Weakness in the core business due to market volatility, continued softness in the housing market over the last few quarters, and its ongoing exit from unprofitable and non-strategic businesses will likely impact RH’s revenues in the to-be-reported quarter.

That said, despite a soft sales environment, RH’s promotional activities, 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.

Overall, the company expects revenues for the quarter in the range of $583-$588 million (up 4-5% year over year).

Meanwhile, RH has been posting strong bottom-line growth, buoyed by focus on improving profit margins rather than chasing for sales. The trend is likely to continue in the to-be-reported quarter as well. The company has been benefiting from higher margins, lower tax rate, 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 results in the quarter to be reported.

Meanwhile, RH has been working on cost-saving initiatives such as redesigning its supply chain, reducing inventory, improving product margins and so on.

However, increased shipping and labor costs, as well as modest pressure from RH’s outlet segment may partially restrict margin improvement. Again, more discounts in its outlet stores are likely to weigh on merchandise margins. Meanwhile, increased pricing activities are likely to offset higher product costs from Chinese tariffs.

For the to-be-reported quarter, it expects adjusted gross margin in the band of 38.6-38.9% versus 38% in the year-ago period. Adjusted operating margin is projected in the range of 10-10.6% compared with 9.6% reported in the year-ago quarter. Adjusted SG&A expenses, as a percentage of revenues, are expected in the 28.5-28.2% band compared with 28.5% reported a year ago.

Notably, adoption of ASC 842 accounting standard is expected to act as a headwind to its bottom line.

Overall, fiscal first-quarter earnings per share are projected to grow between $1.47 and $1.58.

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 -4.94%.

Zacks Rank: RH currently carries a Zacks Rank #4 (Sell), which decreases the predictive power of ESP.

Notably, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks Worth a Look

Here are a couple of stocks in the Zacks Retail-Wholesale sector, which have the right combination of elements to beat estimates in their respective quarters to be reported.

CarMax KMX has an Earnings ESP of +2.80% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lovesac Company LOVE has an Earnings ESP of +11.58% and a Zacks Rank #3.

Peer Release

Williams-Sonoma Inc. WSM posted better-than-expected results in first-quarter fiscal 2019. It also lifted its fiscal 2019 earnings guidance, given strong business trend.

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