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RH's Q3 Earnings & Revenues Beat, Shares Rise, '18 View Up

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RH’s (RH - Free Report) shares climbed more than 19% in the after-hour trading session on Dec 3,  following stellar third quarter of fiscal 2018 results. Not only this furniture and housewares company’s earnings and revenues topped the Zacks Consensus Estimate, but also lifted its fourth quarter and fiscal 2018 guidance. The company’s strong pricing, higher outlet margins and continued cost benefits from the new operating platform led to the upside.

Earnings & Revenues

RH reported third-quarter earnings per share of $1.73, surpassing analysts’ expectation of $1.27 by 36.2%. The reported figure surged 66% from the year-ago level and also exceeded the company’s guided range of $1.15-$1.33.

Adjusted revenues (including recall accrual) increased 8% year over year to $638.5 million and also surpassed the consensus mark of $633 million by 0.9%. RH’s comparable brand revenues (comps) rose 4% year over year compared with a 5% increase in the second quarter and 6% growth in the prior-year quarter. Meanwhile, after adjusting for last year’s inventory reduction efforts, its comparable brand revenues increased 6.5%.

 

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Margins

The company’s adjusted gross margin was 40.7% in the quarter, depicting 380 basis points (bps) improvement from the year-ago adjusted level. Adjusted operating margin expanded 220 bps to 10.3%.

Adjusted EBITDA came in at $87.9 million compared with $73.3 million a year ago.

Store Update

As of Nov 3, 2018, RH operated 86 retail galleries. These include 43 legacy galleries, 20 design galleries, two RH Modern Galleries and 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 37 outlet stores compared with 31 a year ago.

Balance Sheet

RH had cash and cash equivalents of $7.8 million as of Nov 3, 2018 compared with $17.9 million on Feb 3, 2018. The company ended the third quarter with merchandise inventories worth $566.1 million compared with $527 million as of Feb 3, 2018.

Raised Q4 Outlook

Revenues are projected in the range of $680-$690 million (versus $665-$685 million projected earlier), reflecting an increase of 8-10% year over year.

Adjusted gross margin is projected in the band of 39.5-40% versus 40-40.5% expected earlier.

Adjusted operating margin is expected in the range of 14.8-15.3% versus earlier expectation of 8-8.9%.

Adjusted SG&A, as a percentage of revenues, is estimated in the 24.6-24.8% band versus 31.6-32% projected earlier.

Adjusted earnings per share are projected between $2.75 and 2.90 versus prior projection within $1.15-$1.33.

2018 Guidance Raised

Net revenues are now expected in the 2.519-$2.529 billion range, representing growth of 5% year over year. Earlier, the company had projected revenue growth in the range of 4-5% on a year-over-year basis.

Adjusted gross margin is projected in the 40.1-40.3% range (versus 40-40.2% expected earlier).

Adjusted operating margin is now expected in the 11.9-12% band, up from the previous expectation of 11.2-11.7%.

Adjusted SG&A, as a percentage of revenues, is expected in the 28.2-28.3% range (versus 28.6-28.7% expected earlier).

Adjusted earnings per share are expected in the $8.33-$8.47 range (earlier expectation was $7.35-$7.75).

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

The company has also raised its long-term targets, as earnings potential and capital efficiency of the new operating model continue to evolve.

Zacks Rank

RH, which shares space with At Home Group Inc. (HOME - Free Report) , Kirkland's, Inc. (KIRK - Free Report) and Ethan Allen Interiors Inc. (ETH - Free Report) in the Zacks Retail - Home Furnishings industry, currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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