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Here's Why RH is Rallying Despite Low Earnings Expectation

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RH (RH - Free Report) is gaining strength amid macroeconomic headwinds like soft housing demand, inflation and backlog shortages, which are still denting home furnishing retailers in the United States. The stock has gained 14.3% in the past month compared with the S&P 500 index’s 6.4% growth.

At the end of May 2023, it reported first-quarter fiscal 2023, where the top and bottom lines surpassed the Zacks Consensus Estimate. Although most of the metrics declined year over year, revenues and adjusted operating margin exceeded the management-provided guidance range. Backed by this outperformance, RH raised its fiscal 2023 net revenues expectation to $3-$3.1 billion from $2.9-$3.1 billion.

However, RH expects continued softness in business trends due to weakness in the housing market, interest rate hikes, uncertainties related to the recent banking crisis and the cycling of record pandemic-driven sales and backlog reductions. Earnings estimates for fiscal 2023 have moved south by nearly 1% in the past seven days, reflecting analysts’ concern over the company’s growth potential.

Other home furnishing retailers like Williams-Sonoma, Inc. (WSM - Free Report) , Fortune Brands Innovations, Inc. (FBIN - Free Report) and Ethan Allen Interiors, Inc. (ETD - Free Report) are also experiencing these headwinds.

Zacks Investment Research
Image Source: Zacks Investment Research

Let’s delve deeper into the factors likely to offset the economic woes.

Strategic Initiatives to Overcome Housing Tepidness

The company’s new strategic operating platform, which includes transitioning from a promotional to a membership model, a distribution center network redesign, the makeover of reverse logistics and outlet businesses and the re-conceptualization of home delivery and customer experience, is driving its performance. These initiatives have helped reduce costs and inventory levels while driving earnings and inventory turns.

RH plans to evolve from a home furnishings retailer to a luxury lifestyle brand over time with the help of Product Elevation, Gallery Transformation, Brand Elevation & Digital Reimagination and Global Expansion moves.

The firm has plans to unveil a collection of new products, with more than 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby & Child and Teen in fiscal 2023. New collections will serve as an inflection point for the business in the second half of fiscal 2023. It also intends to open its first international store, RH England, in June 2023. Impressively, it plans to open nine more international stores in 2024-2025 and smaller format stores in the United States. Its strategy to digitally reimagine the RH brand and business model both internally and externally bodes well.

Margin Expansion Efforts to Somewhat Offset Inflationary Woes

RH’s operating margins have improved significantly over the past several quarters. From fiscal 2016 through fiscal 2021, operating margin increased significantly. However, inflationary pressure and supply chain headwinds have been compressing margins since 2022. The company still anticipates its bottom line to be down compared with the prior year.

Nonetheless, it focuses on some strategic initiatives that are likely to combat this pressure to some extent. These initiatives 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 its core business and cost savings from improvements of its operating platform and organizational structure.

Strong Liquidity to Boost Shareholders Value

At the end of the fiscal first quarter, RH had cash and cash equivalents of $1.52 billion compared with $1.51 billion at the end of fiscal 2022. The available revolving line of credit under the ABL Credit Agreement totaled $478 million. Net debt of $995 million was down from $1,011 million reported at the fiscal 2022-end. An impressive balance sheet position helps the company return its shareholders with great returns.

On Jun 2, 2022, the company’s board of directors authorized an additional $2 billion for purchasing shares of its outstanding common stock, increasing the total authorization to $2,450 million (the “Share Repurchase Program”). During fiscal 2022, it repurchased approximately 3.7 million shares of its common stock at an average price of $269 per share, totaling an aggregate purchase price of approximately $1 billion. As of the first quarter of fiscal 2023, $1.45 billion in shares were available for future share repurchases under this program.

Zacks Rank

RH currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A Brief Discussion on the Abovementioned Stocks

Williams-Sonoma: WSM stock has gained 12.5% over the past month. It carries an impressive VGM Score of A and a Zacks Rank #3.

This home furnishing provider surpassed earnings estimates in three of the trailing four quarters, the average being 4.7%. For fiscal 2023, the earnings expectation for WSM moved up to $13.48 per share from $13.43 in the past 30 days.

Fortune Brands Innovations: FBIN stock has increased 2.5% over the past month and carries a Zacks Rank #2 (Buy).

FBIN topped earnings estimates in the trailing four quarters, the average being 9%. For 2023, the earnings expectation moved up to $3.75 per share from $3.64 in the past 60 days.

Ethan Allen: ETD stock inched up 0.1% over the past month. It carries a Zacks Rank #2 and has a VGM Score of B.

ETD surpassed earnings estimates in all of the trailing four quarters, the average being 32.3%. Earnings estimates for fiscal 2023 have increased to $3.90 per share from $3.79 over the past 60 days.

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