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RH Rides on Hospitality Business Amid Softening Housing Demand
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RH (RH - Free Report) is benefiting from significant contributions from the RH Hospitality business, strategic growth and margin expansion initiatives.
Shares of RH have gained 3.3% against the Zacks Consumer Products - Staples industry’s decline of 11.1% in the past six months.
However, persisting weakness in the housing market and supply chain risks hurt. Earnings estimates for fiscal 2023 decreased to $25.02 per share from $25.22 over the past 30 days, depicting analysts’ concerns over the company’s growth prospects.
Image Source: Zacks Investment Research
Growth Drivers
RH has an integrated RH Hospitality experience in 14 of the Design Gallery locations, which include restaurants and wine bars. Notably, as of the third quarter of fiscal 2022, the company had 28 Design galleries. In addition to this, in September 2022, the company inaugurated its first RH Guesthouse in New York to deliver an exceptional hospitality experience to travelers looking for privacy and luxury. This new opening added to the long-term growth prospects of the company. The company expects to open RH Guesthouse Champagne & Caviar Bar in 2023. The company’s plan to open alluring Design Galleries in every major market will unlock the value of its vast assortment, generating revenues of $5 to $6 billion in North America and $20 to $25 billion internationally in the long term.
Meanwhile, the company has been busy in designing a new operating platform that includes transitioning from a promotional to membership model, distribution center network redesign, the redesign of reverse logistics and outlet business, along with 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 on a number of strategic initiatives to evolve 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 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.
The company remains focused on a number of strategic initiatives that include occupancy leverage that it expects to gain from real estate transformation; product margin expansion as it continues to drive higher full-price selling in the core business; and cost savings from improvements in its operating platform and organizational structure.
Headwinds
RH is highly dependent on housing market demand. Currently, the housing industry is witnessing lower demand due to prevailing market conditions comprising higher mortgage rates. The Fed's determination to curtail inflation through interest rate hikes and quantitative tightening is showing the desired effect of slowing down sales in the housing market across the country. Due to these persistent headwinds, the demand for home furnishing products and services has declined significantly.
Also, the company 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 has been witnessing short-term and long-term delays since the last few quarters. In the fiscal third quarter, the adjusted gross margin contracted 50 basis points (bps) due to fixed occupancy deleverage. Adjusted EBITDA margin also contracted 600 bps year over year to 24.9%.
Some better-ranked stocks from the Zacks Consumer Staples sector are:
Inter Parfums, Inc. (IPAR - Free Report) currently sports a Zacks Rank #1. IPAR delivered a four-quarter average earnings surprise of 36.2%. The company’s shares have risen 68.4% in the past six months.
The Zacks Consensus Estimate for IPAR’s 2023 sales indicates growth of 10.7%, while that for EPS indicates a decline of 0.5% from the prior-year reported figures.
Chewy, Inc. (CHWY - Free Report) also carries a Zacks Rank #1 at present. CHWY came up with a four-quarter average earnings surprise of 82.6%. The stock has risen 14.2% in the past six months.
The Zacks Consensus Estimate for CHWY’s fiscal 2024 sales and EPS indicates growth of 11.2% and 698%, respectively, from the prior-year reported figures.
Post Holdings, Inc. (POST - Free Report) currently sports a Zacks Rank #1. POST has a trailing four-quarter earnings surprise of 34.8%, on average. Shares of the company have gained 0.1% in the past six months.
The Zacks Consensus Estimate for POST’s fiscal 2023 sales and EPS indicates growth of 1.6% and 111.3%, respectively, from the year-ago reported levels.
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RH Rides on Hospitality Business Amid Softening Housing Demand
RH (RH - Free Report) is benefiting from significant contributions from the RH Hospitality business, strategic growth and margin expansion initiatives.
Shares of RH have gained 3.3% against the Zacks Consumer Products - Staples industry’s decline of 11.1% in the past six months.
However, persisting weakness in the housing market and supply chain risks hurt. Earnings estimates for fiscal 2023 decreased to $25.02 per share from $25.22 over the past 30 days, depicting analysts’ concerns over the company’s growth prospects.
Image Source: Zacks Investment Research
Growth Drivers
RH has an integrated RH Hospitality experience in 14 of the Design Gallery locations, which include restaurants and wine bars. Notably, as of the third quarter of fiscal 2022, the company had 28 Design galleries. In addition to this, in September 2022, the company inaugurated its first RH Guesthouse in New York to deliver an exceptional hospitality experience to travelers looking for privacy and luxury. This new opening added to the long-term growth prospects of the company. The company expects to open RH Guesthouse Champagne & Caviar Bar in 2023. The company’s plan to open alluring Design Galleries in every major market will unlock the value of its vast assortment, generating revenues of $5 to $6 billion in North America and $20 to $25 billion internationally in the long term.
Meanwhile, the company has been busy in designing a new operating platform that includes transitioning from a promotional to membership model, distribution center network redesign, the redesign of reverse logistics and outlet business, along with 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 on a number of strategic initiatives to evolve 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 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.
The company remains focused on a number of strategic initiatives that include occupancy leverage that it expects to gain from real estate transformation; product margin expansion as it continues to drive higher full-price selling in the core business; and cost savings from improvements in its operating platform and organizational structure.
Headwinds
RH is highly dependent on housing market demand. Currently, the housing industry is witnessing lower demand due to prevailing market conditions comprising higher mortgage rates. The Fed's determination to curtail inflation through interest rate hikes and quantitative tightening is showing the desired effect of slowing down sales in the housing market across the country. Due to these persistent headwinds, the demand for home furnishing products and services has declined significantly.
Also, the company 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 has been witnessing short-term and long-term delays since the last few quarters. In the fiscal third quarter, the adjusted gross margin contracted 50 basis points (bps) due to fixed occupancy deleverage. Adjusted EBITDA margin also contracted 600 bps year over year to 24.9%.
Zacks Rank & Key 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 from the Zacks Consumer Staples sector are:
Inter Parfums, Inc. (IPAR - Free Report) currently sports a Zacks Rank #1. IPAR delivered a four-quarter average earnings surprise of 36.2%. The company’s shares have risen 68.4% in the past six months.
The Zacks Consensus Estimate for IPAR’s 2023 sales indicates growth of 10.7%, while that for EPS indicates a decline of 0.5% from the prior-year reported figures.
Chewy, Inc. (CHWY - Free Report) also carries a Zacks Rank #1 at present. CHWY came up with a four-quarter average earnings surprise of 82.6%. The stock has risen 14.2% in the past six months.
The Zacks Consensus Estimate for CHWY’s fiscal 2024 sales and EPS indicates growth of 11.2% and 698%, respectively, from the prior-year reported figures.
Post Holdings, Inc. (POST - Free Report) currently sports a Zacks Rank #1. POST has a trailing four-quarter earnings surprise of 34.8%, on average. Shares of the company have gained 0.1% in the past six months.
The Zacks Consensus Estimate for POST’s fiscal 2023 sales and EPS indicates growth of 1.6% and 111.3%, respectively, from the year-ago reported levels.