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RH Shares Up on Q2 Earnings Beat, Demand & Margins Rise Y/Y

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RH (RH - Free Report) reported stellar second-quarter fiscal 2020 results (ending Aug 1, 2020) on the back of strong demand and solid margins. Both adjusted earnings and revenues handily beat the Zacks Consensus Estimate, as well as grew on a year-over-year basis.

Shares of this leading luxury retailer in the home furnishing space spiked 14.5% in the after-hours trading session on Sep 9, post the earnings release. RH witnessed a 16% increase in demand for the fiscal second quarter. For August, the same was up 47% year over year. It further increased to 44% in the beginning of September.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $4.90 per share impressively surpassed the consensus mark of $3.44 by 42.4% and increased a whopping 53.1% from the year-ago level.

RH Price, Consensus and EPS Surprise

RH Price, Consensus and EPS Surprise

RH price-consensus-eps-surprise-chart | RH Quote

Net revenues of $709.3 million grew 0.4% year over year. Adjusting for recall accrual, net revenues increased 0.5% from the prior year to $709.7 million. The figure surpassed the consensus mark of $695 million by 2.1%.

Adjusted gross margin expanded 550 basis points (bps) to 47.5% for the quarter. Adjusted SG&A contracted 140 bps owing to lower advertising and compensation costs, partially offset by an approximate 40 bps drag from incremental COVID-related expenses.

Adjusted operating margin increased a notable 690 bps year over year to a record 21.8%. Adjusted EBITDA also surged 38.9% year over year to $185.8 million for the quarter.

Store Update & Balance Sheet

At Aug 1, RH operated 68 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 15 Waterworks showrooms throughout the United States and U.K., and had sourcing operations in Shanghai as well as Hong Kong.

RH’s cash and cash equivalents were $17.4 million as of Aug 1, 2020 compared with $47.7 million on Feb 1, 2020. The company ended the quarter with merchandise inventories worth $487.6 million compared with $438.7 million as of Feb 1, 2020. Total net debt to trailing 12 months adjusted EBITDA was 1.3 as of Aug 1, 2020.

Net cash provided by operating activities was $128.3 million for the first six months of fiscal 2020 compared with $97.1 million in the comparable year-ago period. Free cash flow totaled $217.6 million at fiscal second quarter-end, up from $109.2 million on Aug 3, 2019.

Fiscal 2020 View

Given uncertainties in the overall market, RH did not provide any guidance for fiscal 2020. With strong demand trends and limited supply, it has redirected resources to focus on persistent elevation and increase of its offerings, expansion in Europe, along with the development of its digital portal — the World of RH. Also, it plans to open the first RH Guesthouse in New York in late spring.

Owing to disruption across the global supply chain, it expects revenue improvement to lag demand growth by approximately 5-10 points in the fiscal third quarter. It expects a positive impact on revenues for the fiscal fourth quarter as manufacturing recovers and inventory receipts catch up to demand. Meanwhile, RH expects adjusted operating margins to expand approximately 20% in fiscal 2020, with revenue growth in mid-single digits.

Long-Term Targets

The company expects to generate net revenues growth of 8-12%, adjusted operating margins in low to mid twenties, adjusted net income improvement of 15-20% and ROIC to be more than 50% in the long run.

Zacks Rank & Peer Releases

RH — which shares space with Haverty Furniture Companies Inc. (HVT - Free Report) in the Zacks Retail - Home Furnishings industry —  currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

At Home Group Inc. (HOME - Free Report) reported impressive results for second-quarter fiscal 2021. The top and bottom lines topped the Zacks Consensus Estimate, as well as grew significantly from the year-ago period.

Williams-Sonoma Inc. (WSM - Free Report) reported better-than-expected second-quarter fiscal 2020 results, courtesy of accelerated e-commerce growth. Non-GAAP adjusted earnings of $1.80 per share surpassed the Zacks Consensus Estimate of 99 cents by 81.8% and increased from 87 cents a year ago. Revenues of $1,490.8 million beat the consensus mark of $1,426 million by 4.5% and grew 8.8% year over year.

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