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Why RH Stock Looks Like a Buy Ahead of High-End Retailer's Q2 2019 Earnings

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Shares of RH (RH - Free Report) , formally known as Restoration Hardware, have soared 65% over the past three months and popped another 3% Friday afternoon heading into the release of its second-quarter financial results on Tuesday, September 10. Now let’s dive into why the high-end furniture and home décor retailer appears to be strong buy right now.

Quick Retail Overview

The second-quarter earnings season is all but over. Yet one of the hottest names in retail just blew away Wall Street Thursday. Lululemon (LULU - Free Report) posted stronger-than-projected quarterly results and boosted its guidance on the back of continued digital and menswear expansion as it further challenges giants like Nike (NKE - Free Report) .

Earlier in the quarter, retail powers Walmart (WMT - Free Report) and Target (TGT - Free Report) continued to prove they can thrive in an Amazon (AMZN - Free Report) obsessed retail age. Meanwhile, the department stores such as Nordstrom (JWN - Free Report) and Macy’s (M - Free Report) have failed to impress investors as they try to adapt.





The RH Pitch

RH has zigged while other retailers have zagged and it has been rewarded for its ability to expand in a quickly changing retail landscape. As other retailers go small, the Corte Madera, California-based company has opened massive, luxury-style stores, with accompanying bars and restaurants.

Management noted last quarter that RH New York is its largest and most important new gallery and that it looks poised to pull in over $100 million in annualized revenue. RH also plans to open its two newest locations—RH San Francisco, The Gallery at The Historic Bethlehem Steel Building, and RH Charlotte, The Gallery at Phillips Place—in the first quarter of fiscal 2020.

The firm has continued to print and distribute its insanely thick catalog as it keeps up its high-end allure. RH also recently introduced its new RH Beach House collection and is set to open RH Ski House and other new galleries this fall. Perhaps more importantly, for now, investors will be happy to hear that the company doesn’t expect the new rounds of tariffs to hurt business.

Late last week, RH announced that it “expects no impact to Fiscal 2019 or Fiscal 2020 financial results from the tariffs imposed on current and new product categories imported from China effective September 1st, 2019, October 1st, 2019 and December 15th, 2019.” RH went on to explain that the projected impacts from increased tariffs will be offset by a combination of “minor” price increases and vendor price reductions.

Along with RH management’s positive U.S.-China trade war outlook, the firm’s stock price climbed this week after reports broke that representatives from the U.S. and China are set to meet in early October. As we mentioned at the top, RH shares have skyrocketed 65% over the last three months on the back of strong Q1 results. RH stock is also up big over the last two years, but with this massive climb has come with some volatility.   

Outlook & Earnings Trends

Looking ahead, our current Zacks Consensus Estimate calls for RH’s Q2 revenue to pop 8.6% from the year-ago period’s $642.65 million to reach $698 million. This would come in above last quarter’s 7.4% sales growth. Meanwhile, RH’s full-year fiscal 2019 revenue is projected to jump 6.4% to reach $2.67 billion. Better yet, the retailer’s fiscal 2020 sales are expected to climb 7.4% to reach $2.87 billion in a sign of continued expansion.

At the bottom end of the income statement, RH’s adjusted Q2 earnings are projected to pop 31.7% and hit $2.70 per share. This would fall short of last quarter’s bottom-line growth, which jumped 53% from the prior-year quarter. But on the positive side, the company destroyed our Q1 estimate that called for $1.54 a share. 

RH’s full-year earnings are projected to pop 10.7%, with 2020 expected to come in 13.4% higher. On top of its growth outlook, the firm’s Q2 and fiscal 2019 and 2020 bottom-line estimates have moved heavily upward recently. Plus, RH has topped quarterly earnings estimates for over three straight years and its overall earnings outlook has continued to trend upward in a big way since 2017.





Bottom Line

RH’s strong earnings revision activity helps the company earn a Zacks Rank #1 (Strong Buy) at the moment. And despite its climb, the company’s valuation picture does not appear that stretched, and it still rests 5% below its 52-week highs.

Therefore, RH stock certainly looks like a stock to consider right now. With that said, it is always worth remembering that playing any stock around earnings comes with inherent risks as no one knows how Wall Street will react even to the best of reports or guidance.

RH is scheduled to release its Q2 fiscal 2019 earnings results after the closing bell on Tuesday, September 10. So make sure to head back to Zacks for a complete breakdown then.

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