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RH Q1 Earnings Meet Estimates, Shares Slip on Soft View

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Shares of RH RH, formerly known as Restoration Hardware, lost 23.4% in after-hour trading on Jun 1, owing to disappointing fiscal 2017 guidance.

Earnings & Revenues

The company reported first-quarter fiscal 2017 earnings per share of 5 cents, reflecting a significant improvement over a loss of 5 cents in the prior-year quarter. Also, earnings were in line with the Zacks Consensus Estimate.

Revenues increased 23% to $562.1 million, surpassing the Zacks Consensus Estimate of $560.4 million by 0.3%. Acquisition of Waterworks accounted for about six percentage points of revenue growth, while another six percentage points came from higher outlet and warehouse sales on accelerated inventory optimization.

RH’s comparable brand revenues increased 9% year over year compared with the 4% increase in the prior-year quarter. The company’s direct revenues increased 23% and store revenues rose 24%.

Restoration Hardware Holdings Inc. Price, Consensus and EPS Surprise

Margins

Meanwhile, adjusted operating income in the reported quarter improved sharply from the prior-year figure of $0.7 million to $8.3 million. Adjusted operating margin expanded 130 basis points (bps) to 1.5%. Adjusted gross profit in the quarter came in at $171.6 million, up 27% year over year. Moreover, adjusted gross margin improved 80 bps to 30.5%.

Store Update

At the end of the fiscal first quarter, RH operated 85 retail outlets, higher than 69 in the prior-year quarter. These included 50 legacy galleries, six large format galleries, eight next generation design galleries, one RH Modern Gallery and five Baby & Child galleries in the U.S. and Canada, and 15 Waterworks showrooms in the U.S. and U.K.  

Balance Sheet

RH had cash and cash equivalents of $80.2 million as on Apr 29, 2017, compared with $87.0 million as on Jan 28, 2017. The company ended the quarter with merchandise inventories of $683.9 million and total shareholders’ equity of $622.8 million.

Second-Quarter Outlook

Revenues are expected in the $595 million to $610 million range, signifying a 9% to 12% increase on a year-over-year basis.

Adjusted net income is projected in the range of $13 million to $15 million, leading to adjusted diluted earnings per share in the 38–43 cents range.

Fiscal 2017 Outlook

Revenues are expected in the $2.4 billion to $2.45 billion range as RH plans to adopt a more aggressive approach to rationalize product offerings, reduce inventories and boost free cash flow.

Though this will drive revenues and cash flow, it will dent earnings. Thus, the company expects adjusted net income in the $60 million to $70 million range (previously $65--$80 million) and adjusted diluted earnings per share of $1.67 to $1.94 (previously $1.78--$2.19).

RH expects to open three next generation Design Galleries this year.

Zacks Rank & Other Stocks to Consider

RH carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the Retail-Wholesale sector include Darden Restaurants, Inc. (DRI - Free Report) , Red Robin Gourmet Burgers, Inc. RRGB and Yum China Holdings Inc. YUMC.

Red Robin Gourmet sports a Zacks Rank #1 (Strong Buy). Full-year 2017 earnings for the company are expected to increase 2.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Yum China, a Zacks Rank #2 stock, is likely to witness 10.7% earnings growth in 2017.

Darden, also a Zacks Rank #2 stock, is expected to witness 12.9% growth in fiscal 2017 earnings.

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