RH To Report Q4 Earnings: Will The Stock Surprise Investors?

RH (NYSE:RH) , formerly Restoration Hardware, is slated to report fourth-quarter fiscal 2017 results (ending Feb 3) after the closing bell on Mar 27.

Last quarter, the company’s earnings met the Zacks Consensus Estimate. Meanwhile, the company also surpassed/met expectations in each of the last four quarters, with the average beat being 16.98%.

In fact, shares of RH, one of the leading home furnishings companies, have rallied 111.7% in the last year, breezing past the Zacks Home Furnishings industry’s gain of only 0.0%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

RH’s efforts toward redesigning its supply chain network, rationalizing product offerings and the Waterworks acquisition are driving its growth and expected to contribute in the to-be-reported quarter as well. The company’s initiatives like RH Modern, RH Teen, RH Hospitality, redesign of RH Interiors Source Book and rollout of Design Ateliers across its retail Galleries are expected to contribute to growth.

The company expects fourth-quarter revenues to be in the range of $655-$680 million, suggesting an increase of 11-15% from the year-ago level. The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $671.5 million, showing an expected 14.5% year-over-year increase.

However, gross margin compression due to increased shipping costs is a cause of concern. The company relies on third-party transportation providers for product shipments from its suppliers to its stores as well as merchandise deliveries to customers. Due to a tight trucking market, RH is expected to incur higher transportation expenses.

That said, RH’s cost saving initiatives such as redesigning its supply chain, reducing inventory, better product margins and more, are likely to offset the above-mentioned margin woes. The company expects adjusted gross margin to be between 37.1% and 37.4%, showing an improvement from 34.6% reported in the year-ago period. Adjusted operating margin is expected to be 10.1-10.6% compared with 8.6% in the fourth quarter of fiscal 2016.

RH’s adjusted net income is expected in the $37-$41 million range for the fiscal fourth quarter. For the quarter, the consensus estimate for earnings is pegged at $1.56 per share, implying significant 129.4% growth.

Meanwhile, due to the disruption caused by the ongoing street construction in the Meatpacking District, RH had earlier decided to delay the opening of the New York Design Gallery until the Spring-Summer of 2018. Hence, the company expects an approximate $9 million negative revenue impact from the delay and a corresponding $1.5 million reduction in adjusted net income in the quarter, both of which are included in its fourth-quarter guidance.

This projection also assumes an approximate $2 million tax benefit, corresponding to an expected 35% tax rate.

What Does the Zacks Model Unveil?

RH does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: RH has an Earnings ESP of -1.71%.

Zacks Rank: RH carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Restoration Hardware Holdings Inc. Price and EPS Surprise

Restoration Hardware Holdings Inc. Price and EPS Surprise | Restoration Hardware Holdings Inc. Quote

Peer Release

Williams-Sonoma Inc.’s (NYSE:WSM) adjusted earnings of $1.68 per share surpassed the Zacks Consensus Estimate of $1.63 in the fourth quarter of fiscal 2017. The figure also increased 8.4% from the year-ago level. Net revenues of $1,680 million came ahead of the consensus mark of $1,649 million and increased 6.2% year over year.

Stocks to Consider

Here are stocks in the retail space that has the right combination of elements to beat on earnings this quarter.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) has an Earnings ESP of +0.07% and a Zacks Rank #3. The company is slated to report quarterly results on April 11.

Amazon.com, Inc. (NASDAQ:AMZN) has an Earnings ESP of +14.98% and a Zacks Rank #3. The company is expected to report quarterly numbers on April 26.

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