We’ve been waiting to see a short-squeeze in RH (NYSE:RH) since the last earnings report and low and beyond it is finally here. The stock is up more than 9% on a strong earnings report but there is a caveat for traders. There is clearly still some bearish sentiment in the market as evidenced by the candle action. If the market can’t get over this we see price action moving lower again before it moves much higher. Marketbeat.com indicates this stock carried a 12.5% short interest coming in December which is definitely playing a part in the post-release surge in prices. Bearish sentiment aside, the results were good and should sustain the long-term rally in share prices. The question of course is when will the bears let go of the stock and let the rally begin?
RH Has Stunning Quarter
RH had a stunning quarter but there are some negatives in the details to be aware of. While the $1.006 in net revenue is up 18.5% on top of last year’s positive comp the growth is down both YOY and sequentially giving evidence that some of the post-COVID surge is dissipating. That said, revenue is up 49% on a two-year basis and beat the Marketbeat.com consensus by the slim margin of 80 basis points. The company says strength in all channels helped to drive revenue and it is expecting to see strength carry into the 4th quarter.
Moving down the report, the company delivered margin improvement at the gross and operating levels. The adjusted gross margin came in at 50.2% and 180 basis points higher than last year while the adjusted operating margin improved a smaller 100 basis points. Regardless, the combined effect is a 13% improvement in adjusted earnings and EPS above the consensus. The $7.03 in adjusted earnings beat the consensus by $0.44 and put the company on track to exceed the consensus for FY earnings by $2.00 to $3.00 if not more.
As for guidance, the company didn’t give specific numbers for earnings but tightened the range for its expected revenue. The company raised the low-end for revenue growth to 32% from 31% with a cap at 33%. The operating margin is expected to expand as well and should drive earnings above expectations as well.
Are The Analysts Giving Up On RH?
The analysts are still generally bullish on RH but there are some signs that sentiment is waning. Not only has the company lost a few analysts over the past couple of months but the ones rating the stock have started to lower their price targets. The latest comes from Citigroup which rates the stock a Buy. Citigroup (NYSE:C) lowered its price target to $766 suggesting about 33% of upside for the stock compared to the broader Marketbeat.com consensus of $718 which implies 14% of upside from recent prices. If this trend persists it could cap gains for the foreseeable future.
The Technical Outlook: RH Was Rangebound And Still Is
Shares of RH had been trading inside a range earlier in the year and appeared to have broken out of it to the downside weeks before the earnings release. Turns out the stock was still range-bound, just with a lower bottom limit than thought, and it remains range-bound now. The post-release action is bullish but does not alter the range-bound nature of trading and suggests resistance and even short-selling is still strong in the upper end of the range. Price action may move higher but, if it does, there is resistance at the top of the range to be worried about.
