RH Rallies on a Slew of Factors: Is There More Room to Run?

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Shares of RHRH have rallied more than 100% in the past year, beating the Zacks Retail - Home Furnishings industry 's rally of 14.4%, justifying the stock's Momentum Score of A. Efforts to redesign supply chain network and rationalize product offerings work as tailwinds for the company.

The company's consistent bottom-line outperformance on the back of various growth initiatives including the transformation to a membership model and strong demand trends has provided some momentum to the stock. The company's earnings surpassed estimates in six of the trailing 10 quarters.

Also, earnings estimates have risen over the past few weeks, suggesting that sentiments on RH are moving in the right direction. Over the past 60 days, the Zacks Consensus Estimate for current year earnings rose 17.2% to $5.85. Also, earnings estimates for the next year have increased 7.2%.

This positive trend reflects analysts' bullish sentiments. The company's Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.

Let us delve into the factors that might help the stock maintain the bull run.

Membership Model Bode Well

The one major change which led to a turnaround in RH's business is the transformation from a promotional to a membership model (RH Members Program). The membership model has eliminated the frantic buying patterns and associated returns, exchanges and canceled orders. This is leading to higher revenues, lower costs and improved margins. With 95% of core RH business driven by members, the shift from a promotional to membership model is a success.

Restaurant Chain to Boost Revenues

RH is focusing on the expansion of chain of restaurants within its stores. The company opened RH Toronto and RH West Palm, its second and third locations with integrated cafés, wine vaults and barista bars. In fact, revenues from RH West Palm are expected to increase in 2018. The company will continue to aggressively invest toward a strong hospitality platform.

In 2018, the company is expected to consistently focus on execution, architecture and cash. It also plans on opening four new Galleries in 2018, which include three integrated cafés, wine vaults and barista bars. Such initiatives are expected to enhance overall customer experience and drive demand.

Cash Position Strong

The company generated $433 million in free cash flow in 2017 enabling the repurchase of 20.2 million shares of RH's stock. Share repurchases benefit the company's earnings per share and boost shareholders' value.

Moreover, free cash flow is projected in excess of $250 million in 2018, indicating a rise from the previous guidance of $240 million.

Upbeat 2018 Outlook

In 2018, net revenues are expected in the $2.53-$2.57 billion range, representing growth of 5-7%. Adjusted gross margin is projected in the 37.7-38.5% range, more than 34.8% in 2017. Adjusted operating margin is expected in the 9.2-10.2% band, showing an increase from the previous estimate of 9-10%.

Adjusted earnings per share are expected in the $5.45-$6.20 range, indicating a rise of 78.6%-103.3% year over year.

Other Stocks to Consider

A few other top-ranked stocks in the Retail-Wholesale sector are, Inc AMZN , Domino's Pizza, Inc DPZ and Darden Restaurants, Inc DRI . carries a Zacks Rank #1 (Strong Buy). Earnings are expected to increase 180% in 2018. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Domino's Pizza, a Zacks Rank #2 stock, is expected to see 55.2% rise in earnings in 2018.

Darden Restaurants, a Zacks Rank #2 stock, is expected to see 18.7% rise in earnings in fiscal 2018.

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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.

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

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