RH Stock Jumps in After-Hours Trading on Upbeat Guidance

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Shares of RH RH , formerly Restoration Hardware, rallied 15.7% in after-hours trading on Nov 15. The gain was prompted by the home furnishings retailer's raised guidance for the fiscal third quarter and fiscal 2017. Per management, this "demonstrates the earnings power of our new membership model, and a dramatically more efficient operating platform."

It is worth mentioning here that RH's shares have performed well so far this year and have rallied more than 171%, significantly outperforming the industry 's gain of just 1.8%.

Estimates for the fiscal third quarter and the fiscal year moved up by 17.1% and 6.6%, respectively, over the last 60 days, reflecting analysts' optimism. The new business model coupled with several growth initiatives should drive the stock's performance.

Revised Outlook

Despite a 1% or 5 cents per share of negative impact from hurricanes Harvey and Irma, RH's adjusted earnings are expected to be in the range of $1.02 to $1.04 per share for the fiscal third quarter compared with the previous guidance of 68 cents to 80 cents. This reflects a substantial increase from the year ago level of 20 cents.

Net revenues for the quarter for this leading luxury retailer in the home furnishing space are likely to be about $592.5 million compared with the previous guidance range of $575-$590 million. The updated guidance reflects an increase of 8% year over year, despite an approximate 1% negative impact from the recent natural calamities.

RH has also increased its fourth-quarter adjusted net income guidance to the range of $37-$41 million from its earlier prediction of $33- $37 million. The increased outlook reflects the improved business performance RH is experiencing along with $2 million of tax benefit despite an approximate $1.5 million negative impact as a result of its decision to delay the opening of its New York Design Gallery to Spring-Summer 2018.

However, net revenues for the fourth quarter are now expected to be in the range of $655-$680 million compared with the previous expectation of $664-$689 million. This is due to a $9 million negative impact from its decision to delay the opening of its New York Design Gallery.

Nonetheless, for fiscal 2017, the company hiked its net income guidance to the range of $82-$87 million from the previous forecast of $70-$77 million. It now expects full-year capital expenditures between $120 million and $130 million, down from the range of $120-$140 million.

The company said that it expects fiscal 2018 net revenues between $2.58 billion and $2.62 billion, adjusted net income in the range of $125-$145 million, and free cash flow of more than $240 million.

Other Developments

RH wrapped up its distribution facility in Los Angeles and has plans of shutting down its distribution center in Dallas by fiscal year 2017 end. Overall, with the elimination of an estimated 1.75 million square feet of distribution space, RH generated savings of approximately $15 million annually.

Meanwhile, RH has completed around 90% of the redesign of its reverse logistics and Outlet business. The move is expected to generate cost savings and enhance margin of $15 million to $20 million annually.

The company anticipates margins to rise and costs to fall as it plans to reduce inventory and benefit from its new operating model. RH remains optimistic about reaching its long-term goal of $4-$5 billion in North American revenues with industry leading operating margins and returns on invested capital.

Zacks Rank & Key Picks

RH currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Zacks Retail-Wholesale sector are TravelCenters of America LLC TA , Dollar General Corporation DG and Dollar Tree, Inc. DLTR , each carrying a Zacks Rank #2 (Buy).

TravelCenters' current-quarter earnings are expected to increase more than 61%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Dollar General's current-quarter earnings are expected to increase 4.8%.

Dollar Tree has an expected earnings growth rate of 22.6% for the current year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: TA , DLTR , DG , RH

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