RH Stock Slides Despite Upward Revision In Q1 Guidance

Luxury home furnishing retailer RH (NYSE:RH) , formerly known as Restoration Hardware, provided a revised outlook for first-quarter fiscal 2017 with faster-than-anticipated revenue growth. However, shares of RH slipped nearly 9% on May 11 following the company’s updated guidance for the upcoming quarterly results, finally ending the session at $57.15 (down 4.73%).

Last week, RH’s stock jumped 10% on the news of a large share buyback program. However, it seems that the stock is now losing volume despite its upbeat guidance.

Reason for the Decline

RH now expects revenues in the range of $558–$562 million, up from the earlier expectation of $530–$545 million in the fiscal first quarter. This implies year-over-year growth rate of 23%, taking the midpoint of the guided range. Earlier, revenues were expected to grow 16%–20%.

For the bottom line, RH narrowed its earnings per share (“EPS”) guidance range to 3–5 cents from its prior projection of 2–6 cents. Adjusted net income is expected in the range of $1.1 million to $1.9 million compared with previous guidance of $0.8 million to $2.4 million.

Though the updated guidance appears to be much better than the previous one at the first glance, the underlying risk lies in the core business revenue growth rates.

The expected 23% revenue growth for the fiscal first quarter is expected to be driven by a 6 points gain from the 2016 acquisition of Waterworks as well as another 6 points gain from higher outlet and warehouse sales. This translates to core business revenue increase of roughly 11%, which is slower than the company’s growth before 2016.

A closer look at the company’s updated guidance reveals that it has lowered the higher end of the guided range on net income and EPS, despite raising the revenue range. This clearly translates to higher costs and margin compression.

In fact, the company said that it generated higher outlet sales due to its inventory optimization plan and related mark-downs had a negative impact on margins and earnings.

Growth Plans Remain Intact

Despite investors’ bearish stance, there are plenty of factors that are likely to support earnings growth, going forward. The company’s new business initiatives like RH Modern, RH Teen, the redesign of RH Interiors Source Book, RH Hospitality, the roll out of Design Ateliers in retail Galleries as well as the introduction of Waterworks to the company’s platform will propel growth in fiscal 2017 and beyond.

Gary Friedman, Chairman and Chief Executive Officer of RH, said, "As we look forward to fiscal 2017, we expect sales growth to continue, operating margins to expand, and to generate significant free cash flow. We remain confident in our ability to drive long-term sustainable growth, improved returns on capital, and tremendous value for our shareholders.”

RH also purchased 7.85 million shares during the fiscal first quarter and closed its $300 million share repurchase program. The company ended the fiscal first quarter with approximately $80 million in cash and cash equivalents with no outstanding borrowings on its $600 million line of credit.

Share Price Performance

Since the beginning of the year, the company’s shares have surged 86.1%, comfortably outperforming the Zacks categorized Retail-Home Furnishing industry’s gain of 2.7%. Management remains optimistic about the company’s performance in fiscal 2017. Further, the overall improvement in the U.S. economy along with the rise in the housing momentum is expected to contribute to RH’s fiscal 2017 results.

Zacks Rank & Key Picks

RH currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Retail-Wholesale sector includes Tecnoglass Inc. (NASDAQ:TGLS) , The Home Depot, Inc. (NYSE:HD) and Aaron's, Inc. (NYSE:AAN) .

Tecnoglass is expected to register 23.3% revenue growth this year. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Home Depot and Aaron's are expected to witness 11.5% and 5% EPS growth this year, respectively. Both these stocks hold a Zacks Rank #2 (Buy).

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