RH to Report Q2 Earnings: Will the Stock Surprise Investors?

We expect RHRH to beat expectations when it reports second-quarter fiscal 2017 (ending Jul 29) results after the closing bell on Sep 6. Last quarter, the company delivered a positive earnings surprise of 25.00%. The company also surpassed expectations in each of the last four quarters, with the average beat being 25.02%. Let's see how things are shaping up prior to this announcement.

Restoration Hardware Holdings Inc. Price and EPS Surprise

Restoration Hardware Holdings Inc. Price and EPS Surprise | Restoration Hardware Holdings Inc. Quote

Why a Likely Positive Surprise?

Our proven model shows that RH is likely to beat earnings because it has the right combination of two key components.

Zacks ESP: RH has an Earnings ESP of +2.88%. That is because the Most Accurate estimate is 49 cents, while the Zacks Consensus Estimate is pegged at 47 cents. A favorable Zacks ESP serves as a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: RH currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have significantly higher chances of beating earnings estimates. Conversely, stocks with a Zacks Rank #4 or 5 (Sell rated) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

The combination of RH's favorable Zacks Rank and positive ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-Than-Expected Earnings?

The company's efforts toward redesigning its supply chain network, rationalizing product offerings and the Waterworks acquisition are driving growth and are expected to contribute in the to-be-reported quarter as well. RH's initiatives like RH Modern, RH Teen, RH Hospitality, redesign of RH Interiors Source Book, and rollout of Design Ateliers across its retail Galleries are expected to contribute to growth in 2017 and beyond.

The company expects second-quarter revenues to be in the range of $595-$610 million, suggesting increase of 9-12% on a year-over-year basis.

The company also announced the completion of its $700 million share repurchase program in July. RH repurchased 12.4 million shares during the second quarter, bringing the new share count to about 21.1 million shares. Combined with the 7.85 million shares repurchased under the company's $300 million program during the first quarter, RH has repurchased 20.2 million shares in fiscal 2017, representing roughly half of the shares outstanding at the end of fiscal 2016. The company exercises aggressive repurchase activity that has helped in driving the stock significantly.

Given the completion of the share-repurchase program, second-quarter earnings are now projected to be in the range of 43-50 cents, assuming about 30 million weighted average shares for the second quarter. The company had expected EPS of 38-43 cents on 34.5 million weighted average shares previously.

That said, the company had earlier stated that the margin outlook for the second quarter will be impacted by the continued disposition and discounting of inventory, and hence expects modest improvement. Gross margin is likely to be modestly positive.

For the fiscal second quarter, the Zacks Consensus Estimate for earnings stands at $2.07, reflecting a 64.2% year-over-year increase. The estimate for revenues is pegged at $2.46 billion, implying 15.2% growth.

Stocks to Consider

Here are a few companies in the Zacks Retail-Wholesale sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:

Dave & Buster's Entertainment, Inc. PLAY has an Earnings ESP of +1.54% and a Zacks Rank #3. The company is scheduled to release quarterly results on Sep 5.

Zumiez Inc. ZUMZ has an Earnings ESP of +16.67% and a Zacks Rank #2. The company is slated to report quarterly results on Sep 7.

Fastenal Company FAST has an Earnings ESP of +2.65% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

The company is expected to release its quarterly results on Oct 10.

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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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