RH Stock Gains On Solid Q1 Earnings, Raised '18 Guidance

RH (NYSE:RH) posted strong first-quarter fiscal 2018 results, with shares gaining a solid 21.6% during after-hours trading. The new membership model — RH Members Program — is improving the company’s brand image, streamlining operations and enhancing customer experience. RH’s efforts to redesign supply chain network and rationalize product offerings bode well.

RH reported first-quarter earnings per share of $1.33, up 5 cents from prior-year quarter’s level. Also, earnings beat the Zacks Consensus Estimate of $1.01 by 31.7%.

Revenues declined 0.8% to $557 million and missed the consensus mark of $564.1 million. RH’s comparable brand revenues inched up 1% year over year compared with 9% increase in the prior-year quarter. The company’s direct revenues fell 1%, while store revenues declined 1%.

Margins

Adjusted operating income of $53.4 million in the reported quarter improved from the prior-year quarter’s figure of $8.3 million. Adjusted operating margin expanded 810 basis points (bps) to 9.6%.

Adjusted gross profit was $211.9 million, up 23.5% year over year. Adjusted gross margin improved 750 bps to 38% owing to strong full price selling, lower outlet revenues, more streamlined distribution and reverse logistics network.

Store Update

As of May 5, 2018, RH operated 84 retail galleries. These include 46 legacy galleries, 17 design galleries, two RH Modern Gallery and four Baby & Child galleries in the United States and Canada, respectively, along with 15 Waterworks showrooms in the United States and the U.K.

The company operated 32 outlet stores compared with 28 in the prior-year quarter.

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Balance Sheet

RH had cash and cash equivalents of $20.8 million as of May 5, 2018 compared with $80.2 million as of Apr 29, 2017. The company ended the quarter with merchandise inventories worth $530.7 million compared with $683.9 million as on Apr 29, 2017.

Second-Quarter Outlook

Revenues are projected in the range of $655-$662 million, reflecting an increase of 6-7% year over year.

Adjusted gross margin is projected in the band of 40.5-40.7%. Adjusted operating margin is expected in the range of 10.8-11.1%.

Adjusted SG&A, as a percentage of revenues, is expected in the 29.6-29.8% range.

Adjusted earnings per share are projected between $1.70 and $1.77.

Raised Outlook

Net revenues are expected in the $2.53-$2.57 billion range, representing growth of 5-7%.

Adjusted gross margin is projected in the 39.3%-39.6% range (37.7-38.5% expected earlier).

Adjusted operating margin is expected in the 10.4-11% band, up from the previous estimate of 9.2-10.2%.

Adjusted SG&A, as a percentage of revenues, is expected in the 28.6-28.9% range (28.3-28.5% expected earlier).

Adjusted earnings per share are expected in the $6.34-$6.83 range ($5.45-$6.20 expected earlier).

Free cash flow is projected in excess of $260 million, up from the previous estimate of $250 million.

Zacks Rank & Other Key Picks

RH carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the Retail-Wholesale sector are Amazon.com, Inc (NASDAQ:AMZN) , Domino's Pizza, Inc (NYSE:DPZ) and Dine Brands Global (NYSE:DIN) .

Amazon.com carries a Zacks Rank #1 (Strong Buy). Earnings are expected to increase 180% in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.

Domino's Pizza, a Zacks Rank #2 stock, is expected to see 55.2% rise in earnings in 2018.

Dine Brands Global, a Zacks Rank #2 stock, is expected to see 23.1% rise in earnings in 2018.

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