Here's Why You Should Hold RH Stock In Your Portfolio Now

RH’s (NYSE:RH) new membership model is improving its brand image, streamlining operations and enhancing customer experience. The company’s efforts to redesign supply chain network and rationalize product offerings bode well. However, dependence on foreign manufacturing and imports makes it vulnerable to uncertain macro conditions.

Meanwhile, this Zacks Rank #3 (Hold) company’s shares have returned 29% in the past six months, against the industry’s decline of 15.8%. Also, estimates for the current year and the next moved up 3% and 13.4%, respectively, over the last 30 days, reflecting analysts’ confidence in the company’s future earnings.

Key Positives

A new membership model and a more efficient operating platform bode well for RH. The model has enhanced the brand, streamlined operations and improved customer experience. The company made significant progress in redesigning its operating platform, simplifying reverse logistics as well as outlet model and reducing inventory by 30% in 2017 compared with the year-ago period.

Now that 95% of the company’s core business is driven by members, it is focusing on the expansion of its chain of restaurants within its stores. The company opened RH Toronto and RH West Palm, its second and third locations with integrated cafés, wine vaults and barista bars. In fact, revenues from RH West Palm are expected to increase significantly in 2018. The company will continue to aggressively invest toward a strong hospitality platform.

In 2018, the company is expected to consistently focus on execution, architecture and cash. It also plans on opening four new Galleries in 2018, which include three integrated cafés, wine vaults and barista bars. Such initiatives are expected to enhance overall customer experience and drive demand.

Hurdles

RH’s business is highly dependent on global trade. A significant portion of its merchandise is sourced from outside the United States, the majority of which originated from China. Thus, any economic or regulatory changes in the foreign countries will dent the company’s business. Implementation of tariffs may lead to an increase in cost of goods sold and hike product prices. This might also lead to a decline in consumer demand, which is likely to mar the company’s financial performance.

The company’s first-quarter 2018 sales guidance is soft. Overall revenues expectation for 2018 is also modestly below estimates. Net revenues are expected to grow 5-7% compared with 14% growth in 2017.

Bottom Line

Though RH is expected to generate soft sales growth this year, analysts are optimistic about the company’s efforts to generate strong cash flow and expect margins to counter lower sales.

The company plans to shift focus toward revenue growth in fiscal 2019, by accelerating its real estate transformation and returning to its product and business expansion strategy, which has been on hold owing to the transformation drive. Net revenue growth is expected to reaccelerate to a range of 8-12% in 2019.

Stocks Worth a Look

A few better-ranked stocks in the Zacks Retail-Wholesale sector are Dine Brands Global, Inc. (NYSE:DIN) , Arcos Dorados Holdings Inc. (NYSE:ARCO) and Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) . While Dine Brands sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dine Brands is expected to witness 22.7% earnings growth in 2018.

Earnings for Arcos Dorados are expected to grow 23.7% in 2019.

Ruth's Hospitality’s 2018 earnings are projected to grow 22.7%.

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