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RH's Q3 Earnings & Revenues Beat Expectations, Rise Y/Y

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RH (RH - Free Report) reported stellar third-quarter fiscal 2020 results (ended Oct 31, 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 gained 0.5% in the after-hours trading session on Dec 9, post the earnings release. RH witnessed a 33% increase in total demand for the fiscal third quarter. For August, September, October and November, the same was up 38%, 37%, 24% and 35%, respectively, year over year. It further increased to 44% at the beginning of September.

RH Price and Consensus

RH Price and Consensus

RH price-consensus-chart | RH Quote

Earnings, Revenue & Margin Discussion

Adjusted earnings of $6.20 per share impressively surpassed the consensus mark of $5.42 by 14.4% and increased a whopping 122.2% from the year-ago level.

Net revenues of $844.8 million grew 24.6% year over year. Adjusting for recall accrual, net revenues increased 24.8% from the prior year to $844.8 million. The figure also surpassed the consensus mark of $842 million by 0.4%.

Adjusted gross margin expanded 670 basis points (bps) to 48.4% for the quarter owing to the investments to elevate the RH brand. Adjusted SG&A contracted 700 bps as a result of not mailing Fall Sourcebooks and lower compensation costs, partially offset by an approximate 20 bps drag from incremental COVID-related expenses.

Adjusted operating margin increased a notable 1,370 bps year over year to a record 26.7%. Adjusted EBITDA also surged 121.8% year over year to $258 million for the quarter. Adjusted EBITDA margin improved 1,330 bps year over year to 30.5%.

Store Update & Balance Sheet

At Oct 31, it operated 68 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 14 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 $88.9 million as of Oct 31, 2020 compared with $47.7 million on Feb 1, 2020. The company ended the quarter with merchandise inventories worth $497.1 million compared with $438.7 million as of Feb 1, 2020. Total net debt to trailing 12 months adjusted EBITDA was 0.8 as of Oct 31, 2020.

Net cash provided by operating activities was $347.3 million for the first nine months of fiscal 2020 compared with $211 million in the comparable year-ago period. Free cash flow totaled $186.2 million at fiscal third quarter-end, up from $95.9 million on Nov 2, 2019.

Fiscal 2020 View

Given solid results so far this year, RH expects adjusted operating margin for fiscal 2020 to reach 21%, with revenue growth of approximately 7%. If revenues grow at a higher-than-forecast rate in the fiscal fourth quarter, adjusted operating margins are expected to expand beyond 21%. Also, it now projects adjusted operating margin to be 25% in the coming years.

For fiscal 2021, RH expects double-digit revenue growth and operating margins to expand. While the accelerated demand in the second half of 2020 presents tough comparisons in 2021, the company expects to have meaningful revenue growth in its restaurants that have not operated at full capacity for entire 2020 and the Contract business, which has not yet recovered from the pandemic crisis. RH also expects a significant pickup as it returns to mailing Fall Interiors and ModernSourcebooks, and introduce substantially more new products. Also, it expects to benefit from approximately $80-$100 million in revenues from the unfilled orders placed in fiscal 2020 that will be delivered in fiscal 2021 and improved in-stock position in the second half of fiscal 2021.

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 #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

At Home Group Inc. (HOME - Free Report) reported third-quarter fiscal 2021 results, wherein earnings beat the Zacks Consensus Estimate, while revenues matched the same. The top and bottom lines grew significantly on a year-over-year basis.

Williams-Sonoma Inc. (WSM - Free Report) recently reported solid third-quarter fiscal 2020 results. The company’s earnings and revenues handily beat the Zacks Consensus Estimate and significantly increased year over year, courtesy of strength across all brands and accelerated e-commerce growth.

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