RH Soars As Investors Look Toward a Potential Recovery

Furnished room with couch, shelves, and window-hanging art.

The retail industry has been under considerable pressure recently, and nowhere has the damage been more evident than in the volatile movements that home-furnishings specialistRH (NYSE: RH) has experienced recently. The company formerly known as Restoration Hardware has been engaged in a long-term restructuring effort to try to regain lost momentum and find a path forward toward renewed growth, but mixed results until now have left shareholders uncertain about RH's future .

Coming into Wednesday's fiscal second-quarter financial report, RH investors wanted to see further signs of progress on key business initiatives from the company. RH's strong results were encouraging, and its positive outlook was able to convince investors that even more success for the company is likely in the long run. Let's look more closely at how RH did and what's ahead for the home-furnishings specialist in the rest of the year and beyond.

RH keeps making progress

Restoration Hardware's second-quarter results were surprisingly strong. Revenue rose by 13% to $615.3 million, slightly outpacing the consensus forecast for growth of between 11% and 12%. RH again posted a net loss on a GAAP basis, but adjusted net income of $19.7 million was higher by about 10% from year-ago levels, and the resulting adjusted earnings of $0.65 per share was far higher than the $0.47 per share that most investors following the stock had expected to see.

Taking a closer look at the numbers, RH pointed to the benefits of the strategic moves that the company has implemented over the past year. The Core RH segment, which excludes the results from its outlet and Waterworks businesses, enjoyed a 10% rise in sales, with comparable brand revenue figures rising 7% from year-ago figures. More importantly, merchandise margin figures in the business were much better, improving by two full percentage points and showing the success of RH's new membership model.

RH is also taking steps to continue to move forward. Inventory reduction efforts weighed on profit margin figures, but they also put the company's outlet-store business on a firmer footing going forward. RH projects that depressed profit margin from the unit will improve in the third quarter and should return to more normal figures by the fourth quarter of 2017.

CEO Gary Friedman spent a long time explaining where RH stands in relation to its longer-term strategy. He characterized 2017 as a "year of execution, architecture, and cash," pointing to the RH Members Program, a more simplified business model and operating platform, expanded product offerings, and the transformation of its store space to emphasize the design gallery concept as key elements to long-term success. Friedman expects that these efforts will keep paying off as customers grow accustomed to the company's new philosophy and see the value proposition it offers.

Can RH maintain its pace?

RH also gave encouraging guidance for the rest of the year. In the third quarter, the retailer expects sales of $575 million to $590 million, resulting in adjusted earnings of $0.68 to $0.80 per share. Fourth-quarter results should be more encouraging, with sales growth of 13% to 17% from year-ago levels resulting in a profit of $1.34 to $1.51 per share.

RH also upgraded its guidance for the full 2017 fiscal year. The retailer now sees total sales of $2.42 billion to $2.46 billion, up $10 million to $20 million from its previous guidance. Earnings guidance saw an even bigger ramp-up, with a new range of $2.43 to $2.67 per share in adjusted earnings marking a roughly $0.75 improvement from what RH anticipated three months ago.

Perhaps most impressively, RH made positive comments about its buyback program and suggested that further repurchases might come in the near future. Given that the retailer has repurchased essentially half of its outstanding shares in the first six months of the year, RH is making a huge bet that its efforts will pay off, yet the company has also been prudent in managing its balance sheet and avoiding taking on extensive debt.

RH investors responded very favorably to the news, and the stock soared more than 35% in after-hours trading following the announcement. With the key holiday season approaching, RH needs to do what it can to sustain its positive momentum and deliver the results that loyal shareholders have been hoping to see throughout the past several years.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy .

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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