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Will RH Benefit From New Business Model in Q3 Earnings?

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RH (RH - Free Report) , formerly Restoration Hardware, is expected to report third-quarter fiscal 2018 results on Dec 4.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 17.8%. Meanwhile, the company surpassed/met expectations in each of the past four quarters, with the average beat being 14.5%.

RH has exhibited a solid performance so far this year, having comfortably outperformed its industry. The company’s shares have climbed 32.9% in the said period against its industry’s decline of 17.1%. The company has been riding high on its efforts to redesign the supply chain network as well as rationalize product offerings.


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

Factors at Play

RH has been exhibiting strong quarterly numbers, buoyed by its focus on improving profit margins rather than chasing for sales. The company has been benefiting from its initiatives to create a new and differentiating shopping experience, with the addition of hospitality (restaurants and cafes) in new Full Line Design Galleries. Overall, from the industry perspective, ongoing job and wage growth, as well as strong consumer confidence are encouraging. However, risks from rising interest rates, slowing housing turnover, increasing raw materials and higher labor costs are pressing concerns.

RH’s efforts toward redesigning its supply chain network as well as rationalizing product offerings are driving growth, and the trend is expected to have continued in the to-be-reported quarter as well. However, last year’s SKU rationalization is expected to be a drag on its revenues by 2.5% in the third quarter and 1.5% in the fourth quarter.

The company expects adjusted revenues for the fiscal third quarter in the range of $624-$636 million (up 5-7% year over year). The Zacks Consensus Estimate for third-quarter revenues is pegged at $632.9 million, reflecting an expected 6.8% year-over-year increase.

Meanwhile, RH is working on various cost-saving initiatives such as redesigning its supply chain, reducing inventory, improving product margins and so on. These helped the company report stellar gross and operating 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, as well as reduced effective tax rate.

However, the new accounting rule will negatively impact third-quarter adjusted operating margins by approximately 200 basis points (bps), while benefiting the fourth quarter by approximately 300 bps. The new accounting rule requires catalog costs to be expensed in the quarter in which the books are distributed versus the previous standard of amortizing the costs over the life of the book.

For the to-be-reported quarter, the company expects adjusted gross margin in the band of 40-40.5% versus 36.9% reported in the year-ago period. Adjusted operating margin is expected in the range of 8-8.9% compared with 8.1% reported in the year-ago quarter. Adjusted SG&A, as a percentage of revenues, is expected in the 31.6-32% range compared with 36.2% in the year-ago period.

Overall, fiscal third-quarter earnings are projected to grow between $1.15 and $1.33 per share. For the quarter, the consensus estimate for earnings is pegged at $1.27 per share, implying significant 22.1% growth from $1.04 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.

Earnings ESP: RH has an Earnings ESP of +1.78%.

Zacks Rank: RH currently carries a Zacks Rank #2 (Buy), 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.

Upcoming Peer Releases

At Home Group Inc. (HOME - Free Report) is slated to report quarterly results on Dec 4. The Zacks Consensus Estimate for quarterly earnings is pegged at 15 cents, depicting an expected 114.3% year-over-year increase.

Kirkland's, Inc. (KIRK - Free Report) is slated to release third-quarter fiscal 2018 results on Nov 29. The Zacks Consensus Estimate for quarterly loss is pegged at 14 cents, wider than the year-ago loss of 10 cents per share.

Peer Release

Williams-Sonoma Inc. (WSM - Free Report) reported non-GAAP earnings of 95 cents per share (at the higher end of the guided range) in the third quarter of fiscal 2018, surpassing the Zacks Consensus Estimate of 94 cents. The figure also grew 13.1% year over year. The company’s revenues of $1,357 million missed the consensus mark of $1,363 million but grew 4.4% year over year.

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