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Here's Why You Should Add RH Stock to Your Portfolio Now

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Shares of RH (RH - Free Report) , formerly known as Restoration Hardware, have been riding high of late. The company’s shares have gained more than 46% on a year-to-date basis against the industry’s decline of 0.8%. The overall improvement in the U.S. economy and a rise in housing momentum are expected to further drive RH’s performance. This leading luxury home furnishings retailer recently reported stellar second-quarter fiscal 2018 results, with earnings beating the Zacks Consensus Estimate.

Notably, earnings estimates for RH have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s earnings for fiscal 2018 has moved up 13.1%, reflecting 10 upward revisions over the past seven days. Also, estimates for fiscal 2019 have climbed 8% over the same time frame, depicting nine positive revisions. This signifies that analysts are optimistic of the company’s future earnings growth, despite much apprehension surrounding the impact of a rising interest rate scenario and other ongoing headwinds.

Let us delve deeper into the other factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What Makes the Stock an Attractive Pick?

Stellar Performance & Upbeat View: RH has been exhibiting strong quarterly numbers, buoyed by its focus on improving profit margins rather than chasing for sales, as well as creating a new and differentiating shopping experience with the addition of hospitality (restaurants and cafes) in new Full Line Design Galleries.

Recently, RH posted strong second-quarter fiscal 2018 results, with earnings beating the Zacks Consensus Estimate by 17.8% and also increasing more than three times from the year-ago quarter despite lower-than-expected revenues. The company’s margins also showed solid improvement. Adjusted gross margins expanded 800 basis points on higher-full-price/lower clearance sales and supply-chain efficiencies.

RH’s focus on executing its new business model, designing a new operating platform and maximizing cash flow via increasing revenues as well as earnings bodes well. Given solid quarterly results, the company raised its fiscal 2018 view. RH now expects adjusted gross margin in the 40-40.2% range (versus 39.3%-39.6% expected earlier). Adjusted operating margin is now expected in the 11.2-11.7% band, up from the previous expectation of 10.4-11%. Finally, adjusted earnings per share are expected in the $7.35-$7.75 range ($6.34-$6.83 expected earlier).

Solid Growth Prospects: RH has solid growth prospects, as is evident from the Zacks Consensus Estimate for its current-year earnings of $7.51 per share, which are expected to grow 146.2% year over year (higher than the industry average of 11.5%). Meanwhile, the company’s revenues are expected to increase by a decent 4.3% in fiscal 2018 (versus 2.8% of the industry). Moreover, its earnings are expected to increase 9.9% on 7% revenue growth in fiscal 2019. Notably, the company has a three-five year expected EPS growth rate of 25.4%.

Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A.

Growth Initiatives to Drive Profitability: In 2016, the company transformed its business from a promotional to a membership model (RH Members Program), which is expected to enhance its brand, streamline operations and enhance customer experience. Meanwhile, RH has been focusing on the expansion of its chain of restaurants within its stores. Also, initiatives like RH Modern, RH Teen, RH Hospitality, the redesign of RH Interiors Source Book, the rollout of Design Ateliers across the company’s retail Galleries are expected to contribute to growth in fiscal 2018 and beyond.

VGM Score: RH has a VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make a solid investment choice.

Superior ROE: RH’s return on equity (ROE) supports its growth potential. Its ROE of 520.9% compares favorably with the industry’s average of 9.3%, implying that it is efficient in using its shareholders’ funds.

Other Stocks to Consider

Other top-ranked stocks in the Retail-Wholesale sector include Advance Auto Parts, Inc. (AAP - Free Report) , AutoZone, Inc. (AZO - Free Report) and O'Reilly Automotive, Inc. (ORLY - Free Report) , each carrying a Zacks Rank #2.

Earnings for Advance Auto, AutoZone and O'Reilly Automotive are expected to increase 29.2%, 15.7% and 34.4%, respectively, for the current year.

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