RH Q2 Earnings & Revenues Beat, View Up, Shares Rise 3.5%

RH (NYSE:RH) reported second-quarter fiscal 2019 results, wherein adjusted earnings and revenues handily beat the respective Zacks Consensus Estimate. The stock gained 3.5% in the after-hour trading session on Sep 10, after the company’s better-than-expected fiscal second-quarter results. Also, it raised its full-year guidance for the third time this year. Notably, RH took measures to mitigate the effects of the U.S.-China trade dispute and expects that tariffs will not impact the company’s ability to achieve financial goals in the long run.

Earnings, Revenue & Margin Discussion

RH’s second-quarter adjusted earnings of $3.20 per share surpassed the consensus mark of $2.70 by 18.5%. Moreover, the reported figure surged a notable 59% from the year-ago level.

Adjusted revenues (including recall accrual) of $706.5 million topped the consensus mark of $698 million by 1.2%. The said figure also increased 9.9% from the year-ago figure of $642.7 million. Despite adverse macro trends and higher tariffs, revenues grew year over year on the back of the core RH business, solid performance of new galleries (mainly RH New York), along with continued expansion of RH Hospitality. Also, planned accelerated outlet sales owing to the closure of a 500,000 square foot distribution facility in fourth-quarter fiscal 2018 added to the positives.

The company’s adjusted operating margin expanded 320 basis points (bps) year over year to 14.9%. Adjusted EBITDA also grew 29.8% year over year to $133.7 million in the quarter.

Store Update

As of Aug 3, 2019, RH operated 70 retail galleries. These include 43 Legacy Galleries, 20 Design Galleries, five Baby & Child Galleries and two Modern Galleries. As of Aug 3, 2019, six of its RH Design Galleries included an integrated RH Hospitality experience. RH operated 70 retail galleries a year ago.

Balance Sheet

RH’s cash and cash equivalents were $11.6 million as of Aug 3, 2019 compared with $5.8 million on Feb 2, 2019. The company ended the fiscal second quarter with merchandise inventories worth $480.7 million compared with $531.9 million as of Feb 2, 2019. Net cash provided by operating activities was $97.1 million compared with $49 million of net cash used for operating activities a year ago.

Raised Full-Year Fiscal 2019 Guidance

Despite increase in tariffs and some negative macro trends, RH remains optimistic about business momentum, buoyed by factors that include the recent mailing of the Fall Interiors and soon to be in-home Modern Source Books, increasing contribution from RH Beach House, the launch of RH Ski House and new Galleries opening this fall.

In view of the recent trends, RH raised its full-year guidance for net revenues, adjusted operating income, operating margin and earnings. The company’s focus on elevating the brand and architecting an integrated operating platform continues to reflect in its profit model leapfrogging past the home furnishings industry. Management believes that the company is gradually becoming one of the few retailers that is persistently boosting revenues, expanding margins, increasing operating earnings and driving significantly higher returns on invested capital.

Adjusted net revenues are now expected in the range of $2,680.3-$2,694.3 million versus $2,658-$2,674 million projected earlier. The guided range is higher than the consensus estimate of $2,670 million.

Adjusted operating margin is now expected in the range of 13.6-13.8% (versus 12.9-13.4% estimated earlier). Adjusted earnings per share are projected between $10.53 and $10.76, higher than the prior guided range of $9.08-$9.52 and consensus estimate of $9.45 (considering the mid-point of the guided range).

However, the company has reiterated long-term targets, as earnings potential and capital efficiency of the new operating model continue to evolve. It continues to expect long-term revenue growth of 8-12% and earnings improvement of 15-20% on an annual basis.

Moreover, the company expects to accelerate real estate transformation to a rate of five-seven new galleries in fiscal 2020 and a minimum of seven new galleries in fiscal 2021. Again, RH is on track to achieve planned asset sales of $50-$60 million during this fiscal year. Free cash flow is expected within $325-$350 million for the current year.

Zacks Rank

RH — which shares space with Tempur Sealy International, Inc. (NYSE:TPX) , At Home Group Inc. (NYSE:HOME) and Williams-Sonoma, Inc. (NYSE:WSM) in the Zacks Retail - Home Furnishings industry — currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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