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RH (RH) Surges on Q4 Earnings Beat, Will it Gain Further?

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Shares of RH (RH - Free Report) , formerly known as Restoration Hardware, advanced nearly 16% in after-hour trading session on Mar 28. The move came after the company reported third successive quarter of earnings beat, when it posted fourth-quarter fiscal 2016 results. Moreover, investors’ optimism about the performance of the company in the coming quarters received a boost after it provided impressive first-quarter and fiscal 2017 guidance.

The company reported fiscal fourth-quarter 2016 earnings per share of 68 cents significantly down from the year-ago figure of 98 cents. However, it managed to surpass the Zacks Consensus Estimate of 65 cents.

Quarter in Detail

Revenues decreased 9.3% to $586.7 million, marginally below the Zacks Consensus Estimate of $589 million. While the company’s adjusted revenues came in at $590.1 million. RH’s comparable brand revenues, including direct revenues, declined 18% year over year compared with 9% increase last year. The company’s direct revenues decreased 15% to $280.5 million, while stores revenues dropped 4% to $306.2 million.

Meanwhile, adjusted operating income in the reported quarter declined sharply from the prior-year figure of $74.2 million to $50.9 million. Adjusted operating margin contracted 290 basis points (bps) to 8.6%. Adjusted gross profit in the quarter came in at $204.5 million, down 11.3% year over year. Moreover, adjusted gross margin declined 100 bps to 34.6%.

Restoration Hardware Holdings Inc. Price, Consensus and EPS Surprise

 

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

Store Update

At the end of the fiscal fourth quarter, RH operated 85 retail outlets. These included 50 legacy galleries, six large format galleries, eight next generation design galleries, one RH Modern Gallery and five Baby & Child galleries. Further, the company has 15 outlets across the U.S. and Canada.

Balance Sheet

RH ended the quarter with cash and cash equivalents of $87 million, merchandise inventories of $752.3 million and total shareholders’ equity of $919.9 million. Additionally, the company had convertible senior notes (net) worth $312.4 million (due in 2019) and $236 million (due in 2020) at the end of the quarter.

Will the Stock Continue its Recent Uptrend?

Shares of RH have taken a sharp U-turn in the last one month, following a decline of nearly 62% in the past two years. In the past one month, the company’s shares have surged 26.5%, comfortably outperforming the Zacks categorized Retail-Home Furnishing industry’s mere gain of 0.6%. Management seems to be very hopeful about its performance in fiscal 2017. Further, management stated that financial results in fiscal 2016 were hurt by strategic investment. However, changes to the business are expected to deliver fruitful results in fiscal 2017 and beyond.

The company’s new business initiatives like RH Modern, RH Teen, the redesign of RH Interiors Source Book, RH Hospitality, the roll out of Design Ateliers in retail Galleries, as well as the introduction of Waterworks to the company’s platform will propel growth in fiscal 2017 and beyond.

In first-quarter fiscal 2017, RH expects revenues in the range of $530–$545 million, indicating a year-over-year growth of 16–20% which includes 5 points gain due to the acquisition of Waterworks as well as another 5 points owing to the higher outlet and warehouse sales. Excluding these factors, the company anticipates revenues growth in the range of 6–10%. Earnings per share for first quarter is expected to be in the between 2 cents and 6 cents. In first-quarter fiscal 2016, the company had reported loss per share of 5 cents.

In the fiscal 2017, RH expects net revenues in the range of $ 2,300–$2,400 million, up 8% to 12% year over year. Adjusted earnings per share for fiscal 2017 are projected to be in the range of $1.78–$2.19, well above the 2016 figure of $1.27.

The Zacks Consensus Estimate for first-quarter and fiscal 2017 are currently pegged at 5 cents and $1.87 per share.

Zacks Rank & Stocks to Consider

RH currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Kate Spade & Company , The Children's Place, Inc. (PLCE - Free Report) and Foot Locker, Inc. (FL - Free Report) . Kate Spade & Company and Children's Place sport a Zacks Rank #1 (Strong Buy) while Foot Locker carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kate Spade & Company delivered an average positive earnings surprise of 14.6% in the trailing four quarters and has a long-term earnings growth rate of 28.3%.

Children's Place delivered an average positive earnings surprise of 39% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Foot Locker delivered an average positive earnings surprise of 2.2% in the trailing four quarters and has a long-term earnings growth rate of 9.7%.

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