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RH's Q2 Earnings Beat Estimates, Margins Down, Q3 View Tepid

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RH (RH - Free Report) posted better-than-expected results for second-quarter fiscal 2023 (ended Jul 29, 2023). The top and bottom lines surpassed the Zacks Consensus Estimate.

The company’s earnings beat estimates in 22 of the last 23 quarters. Despite a continued macroeconomic challenge, revenues and adjusted operating margin exceeded its guided range.

On a year-over-year basis, earnings and revenues declined. RH’s shares dipped 7.75% in the after-hours trading session on Sep 7.

RH continues to expect the luxury housing market and the broader economy to remain challenging in the rest of fiscal 2023 and fiscal 2024. Mortgage rates continue to trend at 20-year highs, which is likely to put pressure on future results.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $3.93 per share strongly topped the consensus mark of $2.63 by 49.4% but decreased 35.8% from the year-ago figure of $6.12.

RH Price, Consensus and EPS Surprise

RH Price, Consensus and EPS Surprise

RH price-consensus-eps-surprise-chart | RH Quote

Adjusted net revenues of $800 million surpassed the consensus mark of $778 million by 2.9% but fell 19.3% on a year-over-year basis.

Adjusted gross margin contracted 530 basis points (bps) to 47.5% in the reported quarter. Adjusted selling, general & administrative expenses decreased by 80 bps to 27.3% of total revenues.

Adjusted operating margin contracted 450 bps year over year to 20.2%. Adjusted EBITDA declined 29.3% year over year to $197.9 million for the quarter. Adjusted EBITDA margin also contracted 350 bps year over year to 24.7%.

Store Update & Balance Sheet

As of Jul 29, there were 68 RH Galleries, 40 outlet stores, one Guesthouse and 14 Waterworks showrooms operational.

In the fiscal second-quarter end, RH’s cash and cash equivalents were $420.6 million compared with $1.51 billion in the fiscal 2022 end (ended Jan 28, 2023).

The company ended the fiscal second quarter with merchandise inventories worth $737.7 million compared with $801.8 million at the end of fiscal 2022.

RH ended the reported quarter with a net debt of $2.09 billion and a net debt to adjusted EBITDA of 2.9.

Net cash provided by operating activities was $248.4 million in the first six months of fiscal 2023 compared with $192.5 million in the comparable year-ago period. Free cash flow totaled $114.2 million in the second quarter of fiscal 2023 versus $23.4 million a year ago.

Adjusted capital expenditures for the reported period were $51.8 million compared with $53.5 million a year ago.

Guidance

For the third quarter of fiscal 2023, RH expects revenues of $740-$760 million and an adjusted operating margin in the range of 8-10%. In third-quarter fiscal 2022, the company reported revenues of $869 million and an adjusted operating margin of 20.8%.

For the fiscal fourth quarter, the company is estimating revenues of $760-$800 million and an adjusted operating margin of 14.4-16.6%, with incremental advertising costs of $5 million versus the prior year. In the year-ago period, RH reported revenues of $772 million and an adjusted operating margin of 16.6%.

For fiscal 2023, RH is raising the low end of the revenue guidance to $3.04-$3.1 billion and maintaining adjusted operating margin views in 14.5-15.5% range. Earlier, it expected net revenues between $3 billion and $3.1 billion. The guided range is still down from the $3.6 billion reported in fiscal 2022.

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.

Peer Releases

Williams-Sonoma, Inc. (WSM - Free Report) reported mixed results in second-quarter fiscal 2023 (ended Jul 30, 2023). Earnings beat the Zacks Consensus Estimate, but revenues missed the same. The metrics declined year over year. The downside was primarily due to the increasing promotional environment and softening industry metrics.

WSM anticipates fiscal 2023 net revenues to decline between 5% and 10%. The company now expects an operating margin of 15-16% versus earlier expectations of 14-15%.

The Lovesac Company (LOVE - Free Report) recently announced some preliminary, unaudited and unreviewed financial results for the second quarter of fiscal 2024 (ended Jul 30, 2023). Impressively, it exceeded the previously provided guidance range for net sales and earnings.

LOVE currently expects a delay in completing its customary quarterly review and reporting process and the filing of its Form 10-Q for the second quarter of fiscal 2024.

Builders FirstSource, Inc. (BLDR - Free Report) reported second-quarter 2023 results wherein earnings and net sales surpassed the Zacks Consensus Estimate. The company has exceeded expectations thanks to a more stable housing environment, a strong value-added product portfolio and the positive impact of operational initiatives implemented in recent years.

However, on a year-over-year basis, BLDR’s results were hampered by declining single-family starts and commodity deflation.

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