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Why RH Sinks 28% Since February Amid Strong Strategic Moves?
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RH (RH - Free Report) has dipped 28.3% since Feb 1 versus the S&P 500 index’s 0.4% fall. The overall economy is dealing with supply chain disruptions and inflationary woes. This luxury retailer in the home furnishings space has also been grappling with these headwinds over the past several quarters.
Additionally, soft housing demand, revenues and backlog shortages and increased dependency on China are ailing RH’s profitability. RH expects continued softness in business trends due to weakness in the housing market, which is likely to persist over the next several quarters, the Federal Reserve’s anticipated interest rate hikes, uncertainties related to the recent banking crisis and the cycling of record pandemic-driven sales and backlog reductions.
Nonetheless, RH has been benefiting from prudent growth initiatives, margin expansion efforts, solid balance sheet and cash flow management.
Image Source: Zacks Investment Research
Major Headwinds Ailing RH
Lackluster Q4 & FY2022 Results: RH has been significantly experiencing supply chain challenges, including port delays, impacting its ability to convert business demand into revenues at normal historical rates. Due to the global supply issue, the company has been witnessing short-term and long-term delays over the last few quarters.
In the fourth quarter of fiscal 2022, adjusted earnings lagged the consensus mark by 14% and decreased 49.1% from the year-ago figure. Adjusted net revenues also missed the consensus mark by 5% and fell 13% on a year-over-year basis. The adjusted gross margin contracted 260 basis points (bps) to 47.8% for the quarter. The decline was due to fixed occupancy deleverage. Adjusted SG&A expenses rose 600 bps to 31.2% of total revenues. The adjusted operating margin contracted 860 bps year over year to 16.6%. Adjusted EBITDA declined 36.1% year over year to $164.9 million for the quarter. The adjusted EBITDA margin also contracted 730 bps year over year to 21.3%.
For fiscal 2022, adjusted earnings of $20.66 per share was down from $26.12 reported a year ago. Net revenues were $3,590.5 million, down 4.5% from a year ago. The adjusted operating margin was 22% in fiscal 2022, down 25.6% a year ago.
Tepid Views: Based on the current market conditions, RH has provided tepid guidance for fiscal 2023. For the first quarter of fiscal 2023, RH expects revenues of $720 to $735 million and an adjusted operating margin in the range of 13-14%. In first-quarter fiscal 2022, RH generated revenues of $957 million and an adjusted operating margin in the range of 24.7%.
For fiscal 2023, RH expects net revenues between $2.9 billion and $3.1 billion, down from the $3.6 billion reported in fiscal 2022. It expects an adjusted operating margin of 15-17% (compared with the 22% reported in fiscal 2022). This guidance includes a 150 bps drag due to the ramp-up of global expansion. It also expects that the 53rd week will generate $60 million in revenues.
Softening Housing Demand: RH and other industry peers are highly dependent on housing market demand. The housing industry is currently witnessing lower demand due to prevailing market conditions. 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.
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 Dependent on Foreign Manufacturers: RH’s business highly depends on the global supply chain. Thus, any economic or regulatory changes in foreign countries will affect RH’s business. Implementing tax or tariffs may increase the cost of goods sold and, in turn, product prices. Based on the total dollar volume of purchases for fiscal 2022, 71% of RH products were sourced from Asia (including 29% from China), 12% from the United States and the remainder from other countries and regions. RH noted that a major section of its products sourced from China had been affected by higher tariffs imposed in 2018 and 2019.
Zacks Rank & Key Retail Picks
RH currently carries a Zacks Rank #5 (Strong Sell).
Some top-ranked stocks in the Zacks Retail-Wholesale sector are Chuy’s Holdings, Inc. (CHUY - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Bloomin’ Brands, Inc. (BLMN - Free Report) .
Chuy’s Holdings currently sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 19.1%, on average.
The Zacks Consensus Estimate for Chuy’s Holdings’ 2023 sales and EPS suggests growth of 10.8% and 19%, respectively, from the corresponding year-ago period’s levels.
Arcos Dorados currently sports a Zacks Rank #1. ARCO has a long-term earnings growth of 7.8%.
The Zacks Consensus Estimate for Arcos Dorados’ 2024 sales and EPS suggests growth of 8% and 11.4%, respectively, from the year-ago period’s levels.
Bloomin' Brands carries a Zacks Rank #2 (Buy). BLMN has a long-term earnings growth rate of 12.3%.
The Zacks Consensus Estimate for Bloomin' Brands’ 2024 sales and EPS suggests growth of 2.4% and 5.5%, respectively, from the year-ago period’s reported levels.
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Why RH Sinks 28% Since February Amid Strong Strategic Moves?
RH (RH - Free Report) has dipped 28.3% since Feb 1 versus the S&P 500 index’s 0.4% fall. The overall economy is dealing with supply chain disruptions and inflationary woes. This luxury retailer in the home furnishings space has also been grappling with these headwinds over the past several quarters.
Additionally, soft housing demand, revenues and backlog shortages and increased dependency on China are ailing RH’s profitability. RH expects continued softness in business trends due to weakness in the housing market, which is likely to persist over the next several quarters, the Federal Reserve’s anticipated interest rate hikes, uncertainties related to the recent banking crisis and the cycling of record pandemic-driven sales and backlog reductions.
Nonetheless, RH has been benefiting from prudent growth initiatives, margin expansion efforts, solid balance sheet and cash flow management.
Image Source: Zacks Investment Research
Major Headwinds Ailing RH
Lackluster Q4 & FY2022 Results: RH has been significantly experiencing supply chain challenges, including port delays, impacting its ability to convert business demand into revenues at normal historical rates. Due to the global supply issue, the company has been witnessing short-term and long-term delays over the last few quarters.
In the fourth quarter of fiscal 2022, adjusted earnings lagged the consensus mark by 14% and decreased 49.1% from the year-ago figure. Adjusted net revenues also missed the consensus mark by 5% and fell 13% on a year-over-year basis. The adjusted gross margin contracted 260 basis points (bps) to 47.8% for the quarter. The decline was due to fixed occupancy deleverage. Adjusted SG&A expenses rose 600 bps to 31.2% of total revenues. The adjusted operating margin contracted 860 bps year over year to 16.6%. Adjusted EBITDA declined 36.1% year over year to $164.9 million for the quarter. The adjusted EBITDA margin also contracted 730 bps year over year to 21.3%.
For fiscal 2022, adjusted earnings of $20.66 per share was down from $26.12 reported a year ago. Net revenues were $3,590.5 million, down 4.5% from a year ago. The adjusted operating margin was 22% in fiscal 2022, down 25.6% a year ago.
Tepid Views: Based on the current market conditions, RH has provided tepid guidance for fiscal 2023. For the first quarter of fiscal 2023, RH expects revenues of $720 to $735 million and an adjusted operating margin in the range of 13-14%. In first-quarter fiscal 2022, RH generated revenues of $957 million and an adjusted operating margin in the range of 24.7%.
For fiscal 2023, RH expects net revenues between $2.9 billion and $3.1 billion, down from the $3.6 billion reported in fiscal 2022. It expects an adjusted operating margin of 15-17% (compared with the 22% reported in fiscal 2022). This guidance includes a 150 bps drag due to the ramp-up of global expansion. It also expects that the 53rd week will generate $60 million in revenues.
Softening Housing Demand: RH and other industry peers are highly dependent on housing market demand. The housing industry is currently witnessing lower demand due to prevailing market conditions. 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.
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 Dependent on Foreign Manufacturers: RH’s business highly depends on the global supply chain. Thus, any economic or regulatory changes in foreign countries will affect RH’s business. Implementing tax or tariffs may increase the cost of goods sold and, in turn, product prices. Based on the total dollar volume of purchases for fiscal 2022, 71% of RH products were sourced from Asia (including 29% from China), 12% from the United States and the remainder from other countries and regions. RH noted that a major section of its products sourced from China had been affected by higher tariffs imposed in 2018 and 2019.
Zacks Rank & Key Retail Picks
RH currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some top-ranked stocks in the Zacks Retail-Wholesale sector are Chuy’s Holdings, Inc. (CHUY - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Bloomin’ Brands, Inc. (BLMN - Free Report) .
Chuy’s Holdings currently sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 19.1%, on average.
The Zacks Consensus Estimate for Chuy’s Holdings’ 2023 sales and EPS suggests growth of 10.8% and 19%, respectively, from the corresponding year-ago period’s levels.
Arcos Dorados currently sports a Zacks Rank #1. ARCO has a long-term earnings growth of 7.8%.
The Zacks Consensus Estimate for Arcos Dorados’ 2024 sales and EPS suggests growth of 8% and 11.4%, respectively, from the year-ago period’s levels.
Bloomin' Brands carries a Zacks Rank #2 (Buy). BLMN has a long-term earnings growth rate of 12.3%.
The Zacks Consensus Estimate for Bloomin' Brands’ 2024 sales and EPS suggests growth of 2.4% and 5.5%, respectively, from the year-ago period’s reported levels.