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RH's Q4 Earnings Beat Estimates, Shares Decline on Soft View

Zacks Equity Research

RH’s RH shares declined 14.2% in the after-hour trading session on Mar 28, despite reporting stellar fourth-quarter fiscal 2018 earnings. The decline in shares was mainly due to bleak outlook for full-year fiscal 2019 and lower-than-expected revenues in fourth-quarter fiscal 2018.

Earnings, Revenues & Margin Discussion

RH’s fourth-quarter adjusted earnings of $3.00 per share surpassed the Zacks Consensus Estimate of $2.83 by 6%. The reported figure surged a notable 78% from the year-ago level and came ahead of its guided range of $2.75-$2.90 per share.

Adjusted revenues (including recall accrual) of $671.8 million missed the consensus mark of $687 million by 2.2%. Nonetheless, the said figure increased marginally from the year-ago level of $669.7 million. RH’s comparable brand revenue (comps) growth was 5% year over year compared with a 4% increase in the fiscal third quarter and 2% improvement in the prior-year quarter.

 

RH Price, Consensus and EPS Surprise

 

RH Price, Consensus and EPS Surprise | RH Quote

The company’s adjusted operating margin expanded 470 basis points (bps) to 15.9% year over year.

Store Update

As of Feb 2, 2019, RH operated 86 retail galleries. These include four new design galleries and four new RH Modern Galleries. It closed five existing stores during fiscal 2019, which includes closing of four legacy galleries and one Waterworks Scottsdale Showroom. The company also opened eight stores in fiscal 2019. RH operated 83 retail galleries a year ago.

Balance Sheet

RH’s cash and cash equivalents were $5.8 million as of Feb 2, 2019 compared with $17.9 million on Feb 3, 2018. The company ended fiscal fourth quarter with merchandise inventories worth $531.9 million compared with $527 million as of Feb 3, 2018. Moreover, net cash provided by operating activities were $300.6 million, below $556.8 million a year ago.

Fiscal 2018 Highlights

Adjusted earnings per share came in at $8.54, up an impressive 180% from the year-ago level of $3.05. The upside was mainly backed by significant growth in operating margin and lower adjusted effective tax rate of 16.9%.

Adjusted revenues increased 5% year over year to $2.51 billion. RH’s comps growth was 4% year over year compared with a 6% increase in the prior-year period.

Adjusted gross margin was 40.1%, expanding 500 bps from the year-ago level. Adjusted operating margins also grew 510 bps to 12.1% in the same period.

Fiscal First-Quarter Guidance

For first-quarter fiscal 2019, revenues are projected in the range of $583-$588 million, reflecting an increase of 4-5% year over year.

Adjusted gross margin is projected in the band of 38.6-38.9%. Adjusted operating margin is expected in the range of 10-10.6%.

Adjusted SG&A, as a percentage of revenues, is estimated in the 28.5-28.2% range. Adjusted earnings per share are projected within $1.47-$1.58. The Zacks Consensus Estimate for the fiscal first quarter is pegged at $1.79, which might witness a downward revision in the coming days.

Full-Year Fiscal 2019 Guidance

Post fourth-quarter fiscal 2018 results, RH has been facing weakness in core business due to market volatility. Continued softness in the housing market over the past few quarters, and its ongoing exit from unprofitable and non-strategic businesses are affecting the company’s profitability. Consequently, it trimmed its previously announced guidance for fiscal 2019. In fact, the current guided range is below market expectations due to the above-mentioned headwinds.

Adjusted net revenues are expected in the range of $2.585-$2.635 million, which is below the consensus mark of $2.76 (considering the midpoint of the guided range) and lower than the earlier guided range of $2.72-$2.82 billion. The midpoint of the guided range was 6 points below the earlier expectation. The guidance reflects an increase of 3-5% year over year.

Adjusted operating margin is expected in the range of 12.7-13.3%. Adjusted earnings per share are projected between $8.41 and $9.08, below the prior guided range of $9.30-$10.70 and the consensus estimate of $9.90.

However, the company has reiterated its long-term targets, as earnings potential and capital efficiency of the new operating model continue to evolve. The company continues to expect long-term revenue growth of 8-12% and earnings improvement of 15-20% on an annual basis.

Meanwhile, the company has plans to open five to seven new galleries in fiscal 2019, up from an average of three to five galleries in a year.

Zacks Rank & Other Key Picks

Currently, RH carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the Retail-Wholesale sector include Williams-Sonoma, Inc. WSM, Haverty Furniture Companies, Inc. HVT and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Williams-Sonoma’s fiscal 2020 earnings growth rate is projected at 2.5%.

Haverty’s earnings surpassed the consensus estimate in each of the trailing four quarters, with average positive surprise of 19.3%.

Darden Restaurants has an expected earnings growth rate of 20.2% for the current year.

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