RH Scales New 52-Week High on Transformation Initiatives

An image of a pencil and a calculator Credit: Shutterstock photo

Shares of RHRH , formerly known as Restoration Hardware, hit a 52-week high of $68.11 on Jul 5. The stock pulled back to end the trading session at $67.37, gaining 3.6% on the day.

Shares of this leading luxury retailer in the home furnishing space have skyrocketed 119.5% on a year-to-date basis, significantly outpacing the Zacks categorized Retail-Home Furnishings industry's growth of 2.2%. That said, we noticed that RH outperformed the industry in each of 4-week, 12-week and 52-week time frames. The overall improvement in the U.S. economy along with the rising housing momentum is expected to drive RH's fiscal-2017 results.

What's Driving the Stock?

In fact, it was a difficult fiscal 2016 for RH as the company's financial results were hurt by its strategic investment. In 2016, the company transformed its business from a promotional to a membership model (RH Members Program), leading to a decline in earnings as well as its share price. However, this transformed business model is expected to enhance its brand, streamline operations and elevate customer experience.

To drive sales in 2017, the company has been focusing on designing new back-end operating platforms. RH has started redesigning its supply chain network, rationalizing product offerings and transitioning inventory into fewer facilities. Also, initiatives such as RH Modern, RH Teen, RH Hospitality, a redesigned RH Interiors Source Book, and rollout of Design Ateliers across the company's retail Galleries are expected to contribute to growth in 2017 and beyond.

In 2017, the company will primarily focus on transformation of its real estate platform, expansion of its product offerings, designing of a new operating platform, in-home delivery experience along with decision data and analytics to support long-term growth.

Since its first-quarter earnings release on Jun 1, shares of RH have increased 17.7% compared with the industry's gain of 9%. RH beaten or met earnings estimates in the trailing four quarters, with an average beat of 13.6%.

The company's first-quarter fiscal 2017 earnings per share of 5 cents reflect a significant improvement over the prior-year quarter's loss of 5 cents. Revenues have also increased 23% year over year. RH's comparable brand revenues have grown 9% year over year compared with the 4% rise in the prior-year quarter. Also, adjusted operating margin expanded 130 basis points (bps) while adjusted gross margin improved 80 bps.

Importantly, RH's acquisition of Waterworks in May 2016 also contributed to its top line. Acquisition of Waterworks accounted for almost six percentage points of revenue growth in the first quarter of fiscal 2017. The addition of Waterworks is expected to prove accretive to the earnings in the years to come.

All these factors are expected to make meaningful contribution to the company's bottom line that is expected to grow a solid 22.5% in 3-5 years.

Zacks Rank & Key Pick

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

Some better-ranked stocks in the Retail-Wholesale sector are Ethan Allen Interiors Inc. ETH , Aaron's, Inc. AAN and Best Buy Co., Inc. BBY .

Aaron's, a Zacks Rank #1 (Strong Buy) stock, surpassed earnings estimates in each of the trailing four quarters, with an average beat of 10.55%. You can see the complete list of today's Zacks #1 Rank stocks here .

Ethan Allen and Best Buy carry a Zacks Rank #2 (Buy). Best Buy is likely to see a rise of 8.7% in full-year 2017 earnings. Ethan Allen's trailing 12-month ROE of 11.31% is higher than the Zacks Retail - Home Furnishings industry's return of 7.61%.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation. See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Aaron's, Inc. (AAN): Free Stock Analysis Report

Best Buy Co., Inc. (BBY): Free Stock Analysis Report

Ethan Allen Interiors Inc. (ETH): Free Stock Analysis Report

Restoration Hardware Holdings Inc. (RH): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

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.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.