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Buy Soaring RH Stock Ahead of High-End Retailer's Q3 Earnings Report?

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RH (RH - Free Report) , or Restoration Hardware as it is still sometimes called despite a rebrand, has seen its stock price skyrocket over 130% in the last six months. RH has found success in a retail industry dominated by Walmart (WMT - Free Report) , Target (TGT - Free Report) , and Amazon (AMZN - Free Report) , by not transforming into an e-commerce focused firm. 

What’s Going On?

RH is a high-end furniture and home décor retailer that has seen its revenues climb steadily and sometimes significantly since it went public in November 2012. The company’s 2018 sales jumped roughly 3%, after they surged over 14% in 2017 as the firm continues to attract consumers into its big brick and mortar locations.

As we mentioned, customers and Wall Street have rewarded RH for its ability to adapt in the modern retail age that has seen Macy’s (M - Free Report) , Nordstrom (JWN - Free Report) , and other department stores tumble. The Corte Madera, California-headquarter firm has gone big and bold, while many try to downsize.

RH has opened more massive, luxury-style stores, with accompanying bars and restaurants in major cities from Chicago to New York. And RH executives plan to expand the retailer’s international reach.

Management has also somewhat successfully navigated the U.S.-China trade dispute, by slowly reducing some of its exposure. “Regarding trade with China, we do not expect the current tariffs to impair our ability to achieve stated financial goals and the impact from the increased tariffs is embedded in our guidance for the year,” the firm wrote in prepared Q2 remarks.

"We continue to receive pricing accommodations from vendors and have implemented price increases where necessary with little to no impact to our business.”





Other Fundamentals

Warren Buffett’s Berkshire Hathaway took a position in RH stock during the third quarter, to add to its portfolio of furniture retailers. This news, as one might assume, helped lift RH shares.

But investors should note that RH stock is pretty heavily shorted at the moment as people bet that the company’s brick-and-mortar expansion won’t be able to hold up in the e-commerce age. In fact, roughly 31% of outstanding shares are being shorted at the moment.

With that said, Buffett and Berkshire clearly believe in RH’s story, which includes a string on share repurchases. Management noted last quarter that it has repurchased roughly 60% of its previously outstanding stock since the start of 2017. This coincides with RH’s impressive run, up over 475% in the past three years. “We believe the repurchase of our shares will prove to be an outstanding allocation of capital for the benefit of our long term shareholders,” management said last quarter.

RH stock is also currently trading at 16.6X forward 12-months Zacks earnings estimates, which marks a discount compared to its industry’s 27.1X average and its own 25X high over the last two years. This helps RH hold an “A” grade for Value in our Style Scores system. RH also rocks a “B” grade for Growth and is part of our Retail – Home Furnishings industry that rests in the top 32% of our more than 250 Zacks industries.





Q3 Outlook & Beyond

Last quarter, RH said that its longer-term targets remain intact. This includes net revenue growth between 8% to 12%, adjusted operating margins in the mid to high teens, and adjusted net income growth of 15% to 20% annually.

Looking ahead, our current Zacks Consensus Estimate calls for RH’s Q3 revenue to jump 5.8%. This would fall short of Q2’s 10.3% revenue expansion. Peeking ahead, the company’s full-year fiscal 2019 revenue is projected to jump 7% to $2.69 billion, with 2020’s revenue expected to climb 7.5% higher to reach $2.89 billion. This would mark the continuation of solid top-line expansion.  

At the bottom end, RH’s adjusted third quarter earnings are projected to surge 27.8% to hit $2.21 per share. The firm’s full-year fiscal 2019 EPS figure is then projected to pop 26.9%, with 2020 expected to jump 15% above our current-year estimate.

Bottom Line

RH’s positive earnings estimate revision activity helps it hold a Zacks Rank #2 (Buy) right now. The company also boasts a strong history of quarterly earnings beats, which includes a 20% average beat in the trailing four periods.

RH also trades pretty heavily around earnings. RH stock soared after its last two quarterly earnings reports but tumbled in two out of the prior three periods. With this in mind, risk-averse investors might want to wait to buy RH stock after they see how Wall Street reacts.

RH is set to report its third quarter fiscal 2019 financial results after the closing bell on Wednesday, December 4.

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