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Why Is Restoration Hardware (RH) Up 8.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Restoration Hardware (RH - Free Report) . Shares have added about 8.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Restoration Hardware due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

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

RH 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.

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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -6.7% due to these changes.

VGM Scores

Currently, Restoration Hardware has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Restoration Hardware has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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