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Restoration Hardware (RH) Up 48.2% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Restoration Hardware (RH - Free Report) . Shares have added about 48.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Restoration Hardware due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

RH Beats on Q4 Earnings, Misses on Revenues, Withdraws '20 View

RH reported fourth-quarter fiscal 2019 results, wherein adjusted earnings beat the Zacks Consensus Estimate but revenues missed the same.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $3.72 per share surpassed the consensus mark of $3.59 by 3.6%. Moreover, the reported figure increased 27% from the year-ago level.

Adjusted revenues (including recall accrual) of $665 million missed the consensus mark of $709.6 million by 6.3%. The figure also declined 1% from the year-ago figure of $671.8 million.

While fourth-quarter adjusted revenues were lower than the company’s expectation, adjusted earnings surpassed the same for the 13th consecutive quarter, as it continues to manage the business with a bias for earnings versus revenue growth. The lower revenues were due to two main reasons. First, the elimination of its Holiday assortment caused unforeseen collateral damage to its core business due to lower customer traffic in both stores and online during the peak weeks. Second, the company experienced higher-than-expected backorders due to a 18% year-over-year drop in inventories.

Adjusted gross margin increased 390 bps to 42.6% in the quarter. The company’s adjusted operating margin expanded 230 bps year over year to a record 17.4%, driven by higher product margins, accompanied with lower occupancy and shipping costs owing to the elimination of Holiday assortment and continued efficiencies of a new operating platform. Adjusted EBITDA also grew 10.3% year over year to $145 million in the quarter.

Store Update

As of Feb 1, 2020, RH operated 68 retail galleries. These include 40 Legacy Galleries, 22 Design Galleries, four Baby & Child Galleries, and two Modern Galleries throughout the United States and Canada. It also operated 15 Waterworks showrooms throughout the United States and in the U.K.

Balance Sheet

RH’s cash and cash equivalents were $47.7 million as of Feb 1, 2020 compared with $5.8 million as on Feb 2, 2019. The company ended fiscal 2019 with merchandise inventories worth $438.7 million compared with $531.9 million as of Feb 2, 2019. Net cash provided by operating activities was $339.2 million in fiscal 2019, reflecting an increase from $249.6 million in the year-ago period.

Fiscal 2019 Highlights

Adjusted earnings of $11.66 per share increased a notable 49.5% from $7.80 a year ago. Adjusted revenues grew 5.4% to $2,647 million from $2,510.4 million a year ago. Adjusted gross margin expanded 190 bps to 41.4%. Adjusted operating margin grew 290 bps to 14.3% in fiscal 2019.

Withdraws Guidance Amid Coronavirus Crisis

In view of the major disruption in financial markets and retail business operations due to the COVID-19 outbreak, RH has withdrawn all prior guidance pertaining to fiscal 2020. Additionally, the company will take more steps such as deferring new business introductions and capital spending, while reducing costs to navigate through the short-term challenges of this crisis.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -83.59% due to these changes.

VGM Scores

Currently, Restoration Hardware has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Restoration Hardware has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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