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Restoration Hardware (RH) Down 9.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Restoration Hardware (RH - Free Report) . Shares have lost about 9.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Restoration Hardware due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

RH Tops Q2 Earnings, Lags Sales Estimates, Revises ’18 View

RH reported mixed second-quarter fiscal 2018 results, with earnings surpassing the Zacks Consensus Estimate but revenues lagging the same. In spite of a raised fiscal 2018 earnings guidance, the company’s shares declined 13.1% on Sep 5 as investors’ sentiments were hurt by a soft revenue view.

RH reported second-quarter earnings per share of $2.05 compared with 65 cents in the prior-year quarter. Also, earnings beat the Zacks Consensus Estimate of $1.74 by 17.8%.

Adjusted revenues (including recall accrual) increased 3.8% year over year to $642.7 million but missed the consensus mark of $661 million. RH’s comparable brand revenues rose 5% year over year compared with a 7% increase in the prior-year quarter. The company’s direct revenues increased 5% and store revenues rose 3%.

Margins

Adjusted operating income of $79 million in the reported quarter improved from the prior-year quarter’s $39.9 million. Adjusted operating margin expanded 590 basis points to 12.3%.

Adjusted gross profit was $270.4 million, up 28.2% year over year. Adjusted gross margin improved 800 bps to 42.1%, owing to robust full price selling, lower outlet revenues, efficient distribution channel as well as reverse logistics network.

Store Update

As of Aug 4, 2018, RH operated 85 retail galleries. These include 44 legacy galleries, 18 design galleries, two RH Modern Gallery, coupled with six Baby & Child galleries in the United States and Canada, respectively, along with 15 Waterworks showrooms in the United States and the U.K.
The company operated 36 outlet stores compared with 28 a year ago.

Balance Sheet

RH had cash and cash equivalents of $22.2 million as of Aug 4, 2018 compared with $21.6 million on Jul 29, 2017. The company ended the second quarter with merchandise inventories worth $551.3 million compared with $608 million as of Jul 29, 2017.

Q3 Outlook Issued

Revenues are projected in the range of $624-$636 million, reflecting an increase of 5-7% year over year.

Adjusted gross margin is projected in the band of 40-40.5%.

Adjusted operating margin is expected in the range of 8-8.9%.

Adjusted SG&A, as a percentage of revenues, is estimated in the 31.6-32% band.

Adjusted earnings per share are projected between $1.15 and $1.33.

2018 Guidance Revised

Net revenues are now expected in the $2.48-$2.52 billion range, representing growth of 4-5% year over year versus 5-7% projected earlier.

Adjusted gross margin is projected in the 40-40.2% range (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%.

Adjusted SG&A, as a percentage of revenues, is expected in the 28.6-28.7% range (28.6-28.9% expected earlier).

Adjusted earnings per share are expected in the $7.35-$7.75 range ($6.34-$6.83 expected earlier).

Free cash flow is projected in excess of $260 million, same as the previous estimate.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.71% due to these changes.

VGM Scores

At this time, Restoration Hardware has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Restoration Hardware has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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