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RH Shares Rise 151% in 3 Months: What's Driving the Stock?

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RH (RH - Free Report) has been riding high on the back of strength of the multi-channel platform and membership model, as well as focus on improving profit margins. Shares of RH, a leading luxury retailer in the home furnishing space, have gained a whopping 150.9% over the past three months compared with the industry’s 87.7% rally. Also, it has outperformed the S&P 500’s 27.2% rise in the said period.

Its price performance is backed by an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing 10 quarters. Earnings estimates for fiscal 2020 and 2021 have moved up 50.9% and 47.7%, respectively, over the past 30 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

What’s Working in Favor of the Stock?

Focus on Margin Expansion: From fiscal 2016 through 2019, RH significantly increased operating margins in the business. For the upcoming period, the company expects persistent improvement in operating margins as a result of focus on a number of strategic initiatives that include: (i) occupancy leverage that it expects to gain from real estate transformation (ii) product margin expansion as it continues to drive higher full price selling in core business and (iii) cost savings from improvements in the operating platform and organizational structure.

Impressively, CEO Friedman reaffirmed the company’s ability to attain positive operating margin expansion in fiscal 2020 and highlighted a clear pathway to achieve an operating margin of approximately 20% in the next few years. Specifically, management expects Outlet margins to positively impact this fiscal year’s operating margins by 100 basis points or bps, while cycling last year’s elevated outlet sales. Management had anticipated at least 200 bps of operating margin expansion in fiscal 2020 before the COVID-19 crisis.

Solid Performance: In fiscal 2019, adjusted operating margins expanded 290 bps year over year to reach the industry-best figure of 14.3% and adjusted earnings per share advanced 49%. It also generated $330 million of free cash flow in fiscal 2019. The company maintained solid performance even during the pandemic. RH posted stronger-than-expected fiscal first-quarter results supported by solid gross margin expansion. Although the top line was challenged, RH executed well in the quarter via avoiding promotions and controlling costs. The company’s strength of the multi-channel platform and membership model enabled it to engage with customers virtually and not chase demand through promotions. Encouragingly, demand trends have improved after the fiscal first quarter, with core demand up 7% year over year in May and 11% in the first week of June.

Growth Initiatives to Drive Profitability: During fiscal first-quarter earnings call, the company’s management emphasized on a number of strategic initiatives to evolve RH from a home furnishings retailer to a luxury lifestyle brand over time including: 1) a transformation of the website to "The World of RH", 2) expansion of interior design services to include architecture and landscape architecture; 3) the launch of RH Residences, or furnished homes and condos; 4) launch of RH3, a luxury yacht that customers can rent for travel to the Caribbean and Mediterranean; and 5) international expansion in Europe, with the first three stores expected in the U.K. and France.

Other Stocks to Consider

Other top-ranked stocks in the same industry include Haverty Furniture Companies Inc. (HVT - Free Report) , Williams-Sonoma, Inc. (WSM - Free Report) and The Lovesac Company (LOVE - Free Report) . While Haverty Furniture and Williams-Sonoma sport the same rank as RH, Lovesac carries a Zacks Rank #2 (Buy).

Earnings of Haverty Furniture and Lovesac surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with the average positive surprise being 32.3% and 15.6%, respectively.

Earnings of Williams-Sonoma surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average surprise being 183.3%.

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