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RH to Report Q1 Earnings: Will the Beat Streak Continue?

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RH (RH - Free Report) , formerly Restoration Hardware, is expected to report first-quarter fiscal 2018 results on Jun 7.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Meanwhile, the company surpassed/met expectations in the last four quarters, with the average beat being 17.91%.

The new membership model — RH Members Program — is improving its brand image, streamlining operations and enhancing customer experience. The company’s efforts to redesign its supply chain network and rationalize product offerings bode well.

Meanwhile, year-to-date performance has not been an encouraging one for the home furnishing industry. Despite belonging to the same industry, RH has managed to navigate smoothly. So far this year, the Zacks Home Furnishings industry has witnessed a fall of 11.8% against the S&P 500’s gain of 2.3%. However, the sluggish run of the industry has been mitigated to a certain extent by the exceptional performance of RH, whose shares have gained 14% in the same time frame.


Let’s see how things are shaping up prior to this announcement.

Factors at Play

RH’s efforts toward redesigning its supply chain network and rationalizing product offerings are driving its growth, and the trend is expected to have continued in the to-be-reported quarter as well. The company’s initiatives like RH Modern, RH Teen, RH Hospitality, redesign of RH Interiors Source Book and the rollout of Design Ateliers across its retail Galleries are expected to contribute to growth.

The company expects first-quarter revenues to be in the range of $555-$565 million compared with $562 million reported in the year-ago quarter. The Zacks Consensus Estimate for first-quarter revenues is pegged at $564 million, showing an expected 0.4% year-over-year increase. Revenues are expected to be roughly flat, incorporating approximately 5% headwind from cycling last year’s inventory-optimization efforts.

Meanwhile, RH is working on various cost-saving initiatives such as redesigning its supply chain, reducing inventory, improving product margins and more. These have helped the company report stellar gross, EBITDA (earnings before interest, tax, depreciation and amortization) and net margins in the last reported quarter. The upside was mainly due to expansion in its product margins, lower SG&A (selling, general and administrative) expenses and reduced effective tax rate.

For the to-be-reported quarter, the company expects adjusted gross margin in the band of 36.4-36.8% versus 30.5% reported in the year-ago level. Adjusted operating margin is expected in the range of 7.6-8.1% compared with 1.5% reported in the year-ago quarter. Adjusted SG&A, as a percentage of revenues, is expected in the 28.7-28.8% range versus 30.3% reported in the first quarter of fiscal 2017.

Overall, despite almost flat revenue growth, first-quarter earnings per share are projected to grow between 95 cents and $1.05 per share, driven by a significant improvement in operating margin. For the quarter, the consensus estimate for earnings is pegged at $1.01 per share, implying significant growth from earnings of 56 cents per share recorded in the year-ago period.

 

What Does the Zacks Model Unveil?

RH has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: RH has an Earnings ESP of +0.54%.

Zacks Rank: RH carries a Zacks Rank #3, which increases the predictive power of ESP. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Peer Release

Williams-Sonoma Inc.’s (WSM - Free Report) adjusted earnings of 67 cents per share surpassed the Zacks Consensus Estimate of 57 cents as well as the company’s guided range of 55-60 cents in the first quarter of fiscal 2018. The figure also increased 31.4% from the year-ago level. Net revenues of $1,203 million came ahead of the consensus mark of $1,162 million and increased 8.2% year over year.

Stocks to Consider

A few better ranked stocks in the Retail-Wholesale sector include Kirkland's, Inc. (KIRK - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) both carry a Zacks Rank #2 (Buy).

Kirkland's and Darden’s earnings are projected to grow 29% and 18.9%, respectively, this year.

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