RH's Shares Gain 25.6% on Q1 Earnings Beat & Upbeat Outlook

RH RH reported stellar first-quarter fiscal 2019 results, wherein adjusted earnings and revenues surpassed analysts’ expectations. The stock gained more than 25% in the after-hour trading session on Jun 12, after the company issued strong full-year guidance. Notably, it took measures to mitigate the effects of the U.S.-China trade dispute and expects that tariffs will not impact the company’s ability to achieve financial goals in the long run.

Earnings, Revenues & Margin Discussion

RH’s first-quarter adjusted earnings of $1.85 per share surpassed the Zacks Consensus Estimate of $1.54 by 20.1%. Moreover, the reported figure surged a notable 53% from the year-ago level and came well ahead of its guided range of $1.47-$1.58 per share.

Adjusted revenues (including recall accrual) of $598.8 million topped the consensus mark of $583 million by 2.7%. The said figure also increased 7.4% from the year-ago figure of $557.4 million.

Despite adverse macro trends and higher tariffs, revenues grew year over year aided by the recent introduction of the RH Beach House, continued elevation and expansion of its product offerings, investments in RH Interior Design, launch of the RH Ski House, along with new galleries opening this fall.
The company’s adjusted operating margin expanded 300 basis points (bps) to 11.8% year over year. Adjusted EBITDA also grew 25.7% year over year to $100.4 million in the quarter.

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Store Update

As of May 4, 2019, RH operated 70 retail galleries. These include 43 Legacy Galleries, 20 Design Galleries, five Baby & Child Galleries and two Modern Galleries. As of May 4, 2019, six of its RH Design Galleries included an integrated RH Hospitality experience. RH operated 69 retail galleries a year ago.

Balance Sheet

RH’s cash and cash equivalents were $102.6 million as of May 4, 2019 compared with $5.8 million on Feb 2, 2019. The company ended the fiscal first quarter with merchandise inventories worth $530.2 million compared with $531.9 million as of Feb 2, 2019. Net cash provided by operating activities was $38.6 million compared with $3.2 million of net cash used for operating activities a year ago.

Full-Year Fiscal 2019 Guidance

In view of a stellar start to fiscal 2019, RH raised its full-year guidance for net revenues, adjusted operating income, adjusted operating margin and adjusted earnings. The company’s focus on elevating the brand and architecting an integrated operating platform continues to reflect in its profit model leapfrogging past the home furnishings industry. Management believes that the company is gradually becoming one of the few retailers boosting revenues, expanding margins, increasing operating earnings and driving significantly higher returns on invested capital.

Adjusted net revenues are now expected in the range of $2,642.8-$2,662.8 million versus $2,585-$2,635 million projected earlier. The guided range is higher than the consensus estimate of $2,605 million.

Adjusted operating margin is now expected in the range of 12.6-13.2% (versus 12-12.6% expected earlier). Adjusted earnings per share are projected between $8.76 and $9.27, above the prior guided range of $8.05-$8.69 and the consensus estimate of $8.33.

However, the company has reiterated long-term targets, as earnings potential and capital efficiency of the new operating model continue to evolve. It continues to expect long-term revenue growth of 8-12% and earnings improvement of 15-20% on an annual basis.

Moreover, the company expects to accelerate real estate transformation to a rate of five-seven new galleries in fiscal 2020 and a minimum of seven new galleries in fiscal 2021. Again, RH is on track to achieve planned asset sales of $50-$60 million during this fiscal year.

Zacks Rank & Key Picks

Currently, RH carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the Retail-Wholesale sector include Ethan Allen Interiors Inc. ETH, Builders FirstSource, Inc. BLDR and BMC Stock Holdings, Inc. BMCH. While Ethan Allen and Builders FirstSource both carry a Zacks Rank #2 (Buy), BMC sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ethan Allen’s earnings are expected to grow 17.8% this year.

Builders FirstSource’s earnings surpassed the consensus estimate in three of the trailing four quarters, with the average positive surprise being 17.9%.

BMC has a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average being 39.4%.

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