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RH Benefits From Strategic Moves, Soft Housing Demand Ails
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Amid housing industry headwinds and inflationary pressure dampening profits, RH (RH - Free Report) has been benefiting from prudent growth initiatives, margin expansion efforts and solid returns.
Shares of this leading luxury retailer in the home furnishing space have increased 4.6% over the past three months, outperforming the S&P 500 index’s 0.6% decline. This trend is expected to continue in the near term, courtesy of its better-than-expected third-quarter fiscal 2022 performance, supported by solid promotional moves and long-term investments.
However, RH expects continued softness in business trends due to weakness in the housing market that will likely persist over the next several quarters and the Federal Reserve’s anticipated interest rate hikes. RH now expects fiscal 2022 net revenues to decline 3.5-4.5% compared with 3.5-5.5% expected earlier.
Image Source: Zacks Investment Research
Nonetheless, it has raised its adjusted operating margin guidance to 21.5-22% versus 21-21.5% of its earlier projection. In the year-ago period, the metric was 25.6%.
Factors Supporting RH
Strategic Initiatives: Over the past five years, RH has been busy architecting a new operating platform that includes transitioning from a promotional to membership model, a distribution center network redesign, the redesign of reverse logistics and outlet businesses and the re-conceptualization of home delivery and customer experience. These initiatives have helped it lower costs and inventory levels while boosting earnings and inventory turns.
RH has been emphasizing a number of strategic initiatives to evolve it from a home furnishings retailer to a luxury lifestyle brand over time, including: Product Elevation, Gallery Transformation, Brand Elevation & Digital Reimagination, and Global Expansion. The Brand Elevation & Digital Reimagination emphasizes on evolving the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces.
Meanwhile, RH’s strategy to digitally reimagine the RH brand and business model both internally and externally bodes well. The company believes that its luxury brand positioning and unique aesthetic have a strong international appeal, and the pursuit of global expansion will provide RH with a substantial long-term market opportunity to build a $20-$25 billion global brand over time.
Moreover, increased focus on its outdoor furniture stores bodes well. As of Oct 29, there were 67 RH Galleries, 39 outlet stores, one Guesthouse and 14 Waterworks showrooms operational.
Margin Expansion Efforts: RH’s operating margins improved significantly over the past several quarters. From fiscal 2016 through fiscal 2021, RH significantly increased operating margins in its business. In the first quarter of fiscal 2022, the adjusted gross margin expanded 480 bps. The upside was driven by an increase in product margins. Adjusted operating margin expanded 210 bps and adjusted EBITDA margin rose 170 bps year over year in that period.
It focuses on a number of strategic initiatives that include: (i) occupancy leverage that it expects to gain from real estate transformation (ii) product margin expansion as it continues to drive higher full price selling in core business and (iii) cost savings from improvements of its operating platform and organizational structure. Although the current market situation is unfavorable for RH, these will certainly help the company in the long run.
Superior ROE: RH’s superior return on equity (ROE) is indicative of growth potential. The company’s ROE currently stands at 58.9%. This compares favorably with a ROE of 15.6% for the Retail - Home Furnishings industry as a whole. This indicates RH’s efficiency in using shareholders’ funds and ability to generate profit with minimum capital usage.
Major Headwinds Ailing RH
Supply-Chain & Inflationary Woes: RH has been significantly experiencing supply chain challenges, including port delays, which have impacted its ability to convert business demand into revenues at normal historical rates. Due to the supply issue across the world, the company witnessed short-term and long-term delays in the last few quarters.
In the fiscal third quarter, adjusted gross margin contracted 50 basis points (bps) due to fixed occupancy deleverage. Adjusted selling, general & administrative expenses rose 640 bps to 28.9% of total revenues. Adjusted operating margin contracted 690 bps and adjusted EBITDA declined 30.4% year over year. Adjusted EBITDA margin also contracted 600 bps year over year to 24.9%.
RH expects cost pressures to persist for the balance of fiscal 2022 and into the first half of fiscal 2023, primarily across the supply chain. These headwinds include incremental distribution centers, higher product and freight costs, and efforts to best serve its customers by delivering products as timely as possible.
Softening Housing Demand: RH and other industry peers are highly dependent on housing market demand. Currently, the housing industry is witnessing lower demand due to prevailing market conditions. Currently, the Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to have the desired effect of slowing down sales in some markets across the country. On Dec 14, it is likely to announce its final interest rate hike for the year. This is definitely going to hit the housing related industries as well.
The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which could hurt both the economy and the housing market.
Highly Competitive Market: The home furnishings sector is highly competitive. RH competes with the interior design trade, specialty stores, antique dealers, national and regional home furnishings retailers and department stores. In addition, the company competes with mail-order catalogs and online retailers focused on home furnishings. Increased catalog mailings by its competitors may affect response rates to RH’s Source Book mailings. Increased competition has resulted in potential or actual litigation between RH and its competitors related to a variety of activities.
Some better-ranked stocks in the Zacks Construction sector are CRH plc (CRH - Free Report) , Janus International Group, Inc. (JBI - Free Report) and United Rentals, Inc. (URI - Free Report) , each carrying a Zacks Rank #2 (Buy).
CRH manufactures cement, concrete products, aggregates, roofing, insulation and other building materials.
CRH’s expected earnings growth rate for 2022 is 22.1%. The Zacks Consensus Estimate for current-year and next-year earnings has improved to $3.98 and $3.43 per share from $3.46 and $3.42, respectively, over the past 30 days.
Headquartered in Temple, GA, Janus manufactures and supplies turn-key self-storage and commercial and industrial building solutions. Solid backlog levels, an impressive project pipeline, productivity improvements and commercial actions, including pricing, are expected to drive growth. The company is expected to benefit from its one-stop-shop offering with a leading market share position in self-storage doors and related design and installation services.
Janus’ earnings for 2022 are expected to rise 21%. The Zacks Consensus Estimate for current-year and next-year earnings has improved to 75 cents and 88 cents per share from 69 cents and 80 cents, respectively, over the past 30 days.
United Rentals is the largest equipment rental company in the world, with an integrated network of 1,390 rental locations in the United States, Canada and Europe.
URI’s expected earnings growth rates for 2022 and 2023 are 47.3% and 12.5%, respectively. The Zacks Consensus Estimate for current-year and next-year earnings has improved to $32.50 and $36.57 per share from $32.41 and $36.27, respectively, over the past 30 days.
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RH Benefits From Strategic Moves, Soft Housing Demand Ails
Amid housing industry headwinds and inflationary pressure dampening profits, RH (RH - Free Report) has been benefiting from prudent growth initiatives, margin expansion efforts and solid returns.
Shares of this leading luxury retailer in the home furnishing space have increased 4.6% over the past three months, outperforming the S&P 500 index’s 0.6% decline. This trend is expected to continue in the near term, courtesy of its better-than-expected third-quarter fiscal 2022 performance, supported by solid promotional moves and long-term investments.
However, RH expects continued softness in business trends due to weakness in the housing market that will likely persist over the next several quarters and the Federal Reserve’s anticipated interest rate hikes. RH now expects fiscal 2022 net revenues to decline 3.5-4.5% compared with 3.5-5.5% expected earlier.
Image Source: Zacks Investment Research
Nonetheless, it has raised its adjusted operating margin guidance to 21.5-22% versus 21-21.5% of its earlier projection. In the year-ago period, the metric was 25.6%.
Factors Supporting RH
Strategic Initiatives: Over the past five years, RH has been busy architecting a new operating platform that includes transitioning from a promotional to membership model, a distribution center network redesign, the redesign of reverse logistics and outlet businesses and the re-conceptualization of home delivery and customer experience. These initiatives have helped it lower costs and inventory levels while boosting earnings and inventory turns.
RH has been emphasizing a number of strategic initiatives to evolve it from a home furnishings retailer to a luxury lifestyle brand over time, including: Product Elevation, Gallery Transformation, Brand Elevation & Digital Reimagination, and Global Expansion. The Brand Elevation & Digital Reimagination emphasizes on evolving the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces.
Meanwhile, RH’s strategy to digitally reimagine the RH brand and business model both internally and externally bodes well. The company believes that its luxury brand positioning and unique aesthetic have a strong international appeal, and the pursuit of global expansion will provide RH with a substantial long-term market opportunity to build a $20-$25 billion global brand over time.
Moreover, increased focus on its outdoor furniture stores bodes well. As of Oct 29, there were 67 RH Galleries, 39 outlet stores, one Guesthouse and 14 Waterworks showrooms operational.
Margin Expansion Efforts: RH’s operating margins improved significantly over the past several quarters. From fiscal 2016 through fiscal 2021, RH significantly increased operating margins in its business. In the first quarter of fiscal 2022, the adjusted gross margin expanded 480 bps. The upside was driven by an increase in product margins. Adjusted operating margin expanded 210 bps and adjusted EBITDA margin rose 170 bps year over year in that period.
It focuses on a number of strategic initiatives that include: (i) occupancy leverage that it expects to gain from real estate transformation (ii) product margin expansion as it continues to drive higher full price selling in core business and (iii) cost savings from improvements of its operating platform and organizational structure. Although the current market situation is unfavorable for RH, these will certainly help the company in the long run.
Superior ROE: RH’s superior return on equity (ROE) is indicative of growth potential. The company’s ROE currently stands at 58.9%. This compares favorably with a ROE of 15.6% for the Retail - Home Furnishings industry as a whole. This indicates RH’s efficiency in using shareholders’ funds and ability to generate profit with minimum capital usage.
Major Headwinds Ailing RH
Supply-Chain & Inflationary Woes: RH has been significantly experiencing supply chain challenges, including port delays, which have impacted its ability to convert business demand into revenues at normal historical rates. Due to the supply issue across the world, the company witnessed short-term and long-term delays in the last few quarters.
In the fiscal third quarter, adjusted gross margin contracted 50 basis points (bps) due to fixed occupancy deleverage. Adjusted selling, general & administrative expenses rose 640 bps to 28.9% of total revenues. Adjusted operating margin contracted 690 bps and adjusted EBITDA declined 30.4% year over year. Adjusted EBITDA margin also contracted 600 bps year over year to 24.9%.
RH expects cost pressures to persist for the balance of fiscal 2022 and into the first half of fiscal 2023, primarily across the supply chain. These headwinds include incremental distribution centers, higher product and freight costs, and efforts to best serve its customers by delivering products as timely as possible.
Softening Housing Demand: RH and other industry peers are highly dependent on housing market demand. Currently, the housing industry is witnessing lower demand due to prevailing market conditions. Currently, the Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to have the desired effect of slowing down sales in some markets across the country. On Dec 14, it is likely to announce its final interest rate hike for the year. This is definitely going to hit the housing related industries as well.
The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which could hurt both the economy and the housing market.
Highly Competitive Market: The home furnishings sector is highly competitive. RH competes with the interior design trade, specialty stores, antique dealers, national and regional home furnishings retailers and department stores. In addition, the company competes with mail-order catalogs and online retailers focused on home furnishings. Increased catalog mailings by its competitors may affect response rates to RH’s Source Book mailings. Increased competition has resulted in potential or actual litigation between RH and its competitors related to a variety of activities.
Zacks Rank & Key Construction Picks
RH currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Construction sector are CRH plc (CRH - Free Report) , Janus International Group, Inc. (JBI - Free Report) and United Rentals, Inc. (URI - Free Report) , each carrying a Zacks Rank #2 (Buy).
CRH manufactures cement, concrete products, aggregates, roofing, insulation and other building materials.
CRH’s expected earnings growth rate for 2022 is 22.1%. The Zacks Consensus Estimate for current-year and next-year earnings has improved to $3.98 and $3.43 per share from $3.46 and $3.42, respectively, over the past 30 days.
Headquartered in Temple, GA, Janus manufactures and supplies turn-key self-storage and commercial and industrial building solutions. Solid backlog levels, an impressive project pipeline, productivity improvements and commercial actions, including pricing, are expected to drive growth. The company is expected to benefit from its one-stop-shop offering with a leading market share position in self-storage doors and related design and installation services.
Janus’ earnings for 2022 are expected to rise 21%. The Zacks Consensus Estimate for current-year and next-year earnings has improved to 75 cents and 88 cents per share from 69 cents and 80 cents, respectively, over the past 30 days.
United Rentals is the largest equipment rental company in the world, with an integrated network of 1,390 rental locations in the United States, Canada and Europe.
URI’s expected earnings growth rates for 2022 and 2023 are 47.3% and 12.5%, respectively. The Zacks Consensus Estimate for current-year and next-year earnings has improved to $32.50 and $36.57 per share from $32.41 and $36.27, respectively, over the past 30 days.