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Will Higher RH Segment Revenues Benefit Earnings in Q3?

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RH (RH - Free Report) is expected to witness higher revenues, when it reports third quarter of fiscal 2018 results on Dec 4. In fact, revenues of RH Segment, accounting for 95% of its total revenues, will be driven by comparable brand revenue (comps) growth, the addition of new galleries and improvement in direct sales.

RH exhibited a solid performance over the past year, having comfortably outperformed its industry. The company’s shares have climbed 12.4% in the said period against its industry’s decline of 14.3%. The company, which shares space with Williams-Sonoma Inc. (WSM - Free Report) , At Home Group Inc. (HOME - Free Report) and Kirkland's, Inc. (KIRK - Free Report) in the Zacks Retail - Home Furnishings industry, has been riding high on its efforts to redesign the supply chain network as well as rationalize product offerings.

However, the company’s comps and revenues missed analysts’ expectations in the last reported quarter, which negatively impacted the stock’s performance. Also, the implementation of a 10% tariff on furniture imported from China by the Trump administration resulted in a slowdown in the share price performance.

Click here to know how the company’s overall Q3 performance is expected to be.


A Look at Q2 Segmental Performance

RH Segment net revenues increased 4.1% from a year ago to $607.6 million, courtesy of the timing of its Source Book mailings, introduction of new products and product categories, in addition to strong performance of the RH Outdoor product line. In addition, RH Segment core net revenues improved, due to an increase in retail weighted-average leased selling square footage related to new store openings, including West Palm Beach, Toronto, Portland and Nashville. However, these positives were somewhat offset by additional discounts offered on discontinued merchandise related to the optimization of inventory and SKU rationalization during the second quarter of fiscal 2017. Nonetheless, higher revenues from Contract business, RH Hospitality operations and Membership model contributed to overall growth.

Additionally, outlet sales, which comprise sales via warehouse locations, decreased in the quarter mainly due to inventory optimization efforts in the second quarter of fiscal 2017, given increased promotional activity and higher discounts. Similar promotions and discounts were not offered in the second quarter of fiscal 2018.

Meanwhile, RH Segment gross margin, as a percentage of net revenues, increased to 42.5% of net revenues in the quarter from 33.1% a year ago. The upside was owing to higher outlet product margins along with improvement in its core merchandise margins, as the company’s SKU rationalization efforts had a reduced impact on margins this year compared with last year.

The company’s another operating segment Waterworks’ net revenues increased 5.3% from a year ago to $33.2 million in the quarter.

Q3 Expectations

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. RH has opened three new galleries — the Portland gallery, the Nashville gallery and the New York gallery — this year. Nashville as well as New York have restaurants, wine vaults, and barista bars, which are expected to drive RH’s hospitality business.

Meanwhile, in March, RH launched its 2018 RH Outdoor Source Book. It also launched its 2018 RH Interiors and RH Modern Source Books in July. These are anticipated to contribute to overall sales growth of the company.

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. Again, growth in its membership is expected to drive revenues. 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.

Overall, the company expects adjusted revenues for the fiscal third quarter in the range of $624-$636 million (up 5-7% year over year).

Overall Earnings & Revenue Expectations

The Zacks Consensus Estimate for third-quarter revenues is pegged at $632.9 million, reflecting an expected 6.8% year-over-year increase. Also, 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.

RH, a Zacks Rank #2 (Buy) company, has been exhibiting strong quarterly numbers, buoyed by its focus on improving profit margins rather than chasing for sales. Overall, RH’s EPS growth is expected to be driven by revenue improvement, margin expansion and share repurchases. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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