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RH Rallies 84% in the Past Year: Is There More Room to Run?

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RH (RH - Free Report) is riding high on accelerated furniture and home furnishings demand owing to the solid housing market momentum. Additionally, the company has been exhibiting strong profitability, buoyed by its focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants as well as cafes) to new galleries.

Shares of RH have gained 84.2% in the past year compared with the Zacks Retail - Home Furnishings industry’s 69.1% rise. The outperformance can primarily be attributable to the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in the trailing 15 quarters. Earnings estimates for 2021 have moved up 14% over the past seven days, depicting analysts’ optimism regarding its bottom-line growth potential.

Major Growth Drivers

Robust Performance: RH’s solid performance for fiscal second-quarter 2021 is expected to continue in the near term, courtesy of core demand for home furniture and furnishing across the housing market as well as strong margin expansion. The company reported stellar second-quarter fiscal 2021 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate by 28.9% and 1.7%, respectively. The company has been witnessing strong profitability owing to its focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants and cafes) to new galleries.

Strategic Initiatives Driving Growth: RH has been consistently focused on building a new operating platform that includes re-conceptualization of the entire home delivery and customer experience. The company expects multi-year effort to result in an enhanced customer experience, continued margin enhancement and significant cost savings. The company is planning to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of products, places, services and spaces that establish the RH brand as a global thought leader. RH is gradually moving toward fulfilling its long-term plan to come to life digitally as it launches The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of its brand.

Margin Expansion Efforts: RH’s operating margins improved significantly over the past several quarters. The company continued to witness improvement in its margins through a number of initiatives like cost savings from improvements in its operating platform, occupancy leverage that it expects to gain from real estate transformation, product margin expansion as it continues to drive higher full price selling in core business and much more. For second-quarter fiscal 2021, adjusted gross margin expanded 180 basis points (bps) to 49.3%. Adjusted operating margin also expanded a notable 480 bps year over year to 26.6%. Adjusted EBITDA margin expanded 320 bps year over year to 29.4%.

Strong Housing Market Demand: Of late, RH has been observing an increase in demand for housing and an accelerated shift of families to larger suburban homes. The strong home furnishing demand is primarily attributable to the robust momentum in the housing market, given the migration of consumers to larger suburban and second homes. Housing markets have been showing resilience of late, given low mortgage rates. With the reopening of the economy, demand for housing and building material products is improving on the increasing consumer investments in homes amid the pandemic.

Superior ROE: RH’s superior return on equity (ROE) is indicative of growth potential. The company’s ROE currently stands at 131.3%. This compares favorably with ROE of 36% for the industry it belongs to. This indicates RH’s efficiency in using shareholders’ funds and ability to generate profit with minimum capital usage.

Upbeat View: RH’s demand trends are expected to contribute to the company’s results in the rest of fiscal 2021 owing to solid housing and renovation market momentum and low interest rates. Riding on these trends, RH now expects fiscal 2021 revenues to grow 31-33% versus the prior year’s revenue growth of 8%. Adjusted operating margin is anticipated within 24.9-25.5%, indicating growth of 310-370 bps from the year-ago figure of 21.8%. The metric was earlier expected within 23.5-24.3%. ROIC is expected to be 70% for fiscal 2021 versus the previous year’s return of 24%.


Zacks Investment Research
Image Source: Zacks Investment Research

Zacks Rank & Other Key Picks

Currently, RH carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

A few other top-ranked stocks in the same industry include Ethan Allen Interiors Inc. (ETD - Free Report) , Haverty Furniture Companies, Inc. (HVT - Free Report) and Tempur Sealy International, Inc. (TPX - Free Report) , each carrying a Zacks Rank #2 (Buy).

Ethan Allen’s earnings for fiscal 2022 are expected to rise 12.7%.

Haverty Furniture has a trailing four-quarter earnings surprise of 85.2%, on average.

Tempur Sealy has a three to five-year earnings per share growth rate of 21.5%.