RH (NYSE:RH) was one of the first companies to warn the market about inflationary and supply chain hiccups and, as such, we expect to see give some of the earliest insight into what to expect over the summer. As dubious as the company’s bellwether status may be, the message we are getting from the report is not good. There is little to no mention of the supply chain or inflation in the earnings release but several mentions of softening demand trends, loss of market share, and other near-term headwinds to growth. The takeaway in all this is that trading at nearly 12X its earnings with softening growth in the forecast, it is valued at a rate nearly double its peers which puts it in a precarious position. Add in the relatively high 16% short interest and we see no reason why the stock won’t keep moving lower. the company's earnings release said:
“Despite our record financial performance in the first quarter, we have experienced softening demand trends which began at the time of the Russian invasion of Ukraine and have further slowed during the market disruption over the past several months … While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality and navigate through the multiple macro headwinds, we believe our long-term investments will enable us to continue driving industry-leading performance.”
RH Has Blowout Quarter, Shares Fall
RH had a fantastic quarter given the conditions, the expectations, and the comps. The company reported $957.29 million in net revenue for a gain of 11.2% over last year. The growth is not only on top of last year’s 78.6% gain but up nearly 98% in the two-year stack and 350 basis points better than expected.
Moving down to the income, the company reported a 480 basis point increase in both the GAAP and adjusted margin that led to significant outperformance on the bottom line. The operating margin contracted by 40 bps GAAP and 210 BPS adjusted but not enough to offset the top-line strength or the improvement in gross margin. On the bottom line, the company’s net income increased 54% (50% adjusted) and left the GAAP EPS up 190% YOY. The adjusted EPS grew by a smaller 59% YOY but beat the Marketbeat.com consensus by $2.42 or 4500 bps so we don’t mind.
As good as the margin expansion is, there is an offsetting factor that aided the increase. The company reduced its promotional activity in the face of declining demand trends and saved the company millions. In this light, the guidance is not only weak but opens the risk of underperformance should the company decide it needs to start advertising more and/or consumers turn to lower-priced brands.
The Technical Outlook: RH Hit A Bottom, But …
The price action in RH hit a bottom prior to the Q1 release but we don’t think it will stick. Price action was halted at the short-term EMA and is now moving lower in premarket action. The move suggests that not only is resistance still present at the EMA but the downtrend is intact as well. In this light, key support is just below the $290 level and will most likely be tested severely over the next few days to a week. If price action moves below $290 we see it sliding down to the $240 level and to a more reasonable valuation.
