Will Higher Promotional Activity Bolster RH's Q4 Earnings?

RH (NYSE:RH) is expected to have registered higher year-over-year earnings and revenues when it reports fourth-quarter fiscal 2019 results. The results are likely to be backed by core RH business and continued expansion of RH Hospitality.

In the last reported quarter, this leading luxury home furnishing retailer’s earnings surpassed the Zacks Consensus Estimate by 25.7%. Markedly, the company beat earnings expectations in each of the last four quarters, with the average being 17.6%. Moreover, it topped revenue expectation by 0.2% in the fiscal third quarter. Notably, the company’s revenues beat analysts’ expectations in three of the trailing four quarters.

In the fiscal third quarter, its adjusted earnings and revenues (including recall accrual) grew 74% and 6%, respectively, from the year-ago level.

Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has been unchanged at $3.58 over the past 30 days. The estimated figure indicates an increase of 19.3% from $3.00 per share reported in the year-ago quarter. The consensus mark for revenues is pegged at $709.2 million, suggesting a 5.6% improvement from the year-ago reported figure of $671.8 million.

RH Price and EPS Surprise

RH price-eps-surprise | RH Quote

Factors to Note

Focus on brand elevation and architecting an integrated operating platform aided RH to become one of the few retailers with expanding margins, rising operating earnings, while driving significantly higher returns on invested capital.

It is expected to have generated strong earnings growth in the fiscal fourth quarter, buoyed by focus on improving profit margins. The company has been benefiting from strength of the RH brand and business model, along with higher margins. It created a new and different shopping experience with the addition of hospitality (restaurants and cafes) in new Full Line Design Galleries. These positives are expected to reflect on the upcoming results.

That said, some macroeconomic/geopolitical concerns — which comprise high-end housing slowdown in the United States and U.S.-China trade spat — persist. Luxury home sales slowed down in recent times as homes in high-tax areas of the state are facing a decreasing number of potential buyers, given the material loss of deductions under Trump’s new tax plan. Weakness in its core business due to market volatility (although it is likely to have been less in the fiscal third quarter), and exit from unprofitable and non-strategic businesses are likely to have affected RH’s revenues in the to-be-reported quarter. Overall, the company expects revenue growth rate to decelerate in the fiscal fourth quarter to 5-6% from more than 8% in the first half of 2019.

Nonetheless, despite a soft sales environment, RH’s promotional activity, increased pricing activities and a modest uptick in discounts at limited outlet stores are expected to have offset the aforementioned headwinds to some extent.

Meanwhile, the company has been working on cost-saving initiatives such as redesigning the supply chain, reducing inventory, improving product margins and so on. These factors are expected to reflect on the to-be-reported quarter’s results. However, increased shipping and labor costs may have partially restricted its margin improvement. Encouragingly, increased pricing activities are likely to have offset higher product costs from China tariffs.

What the Zacks Model Unveils

RH does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing 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.

Earnings ESP: The company has an Earnings ESP of 0.00%.

Zacks Rank: RH currently carries a Zacks Rank #3.

Stocks Worth a Look

Here are a few stocks in the Zacks Retail-Wholesale sector, which according to our model have the right combination of elements to beat estimates in their respective quarters to be reported.

Costco (NASDAQ:COST) has an Earnings ESP of +0.31% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Cheesecake Factory Incorporated (NASDAQ:CAKE) has an Earnings ESP of +1.67% and a Zacks Rank #3.

CarMax, Inc. (NYSE:KMX) has an Earnings ESP of +0.13% and a Zacks Rank #3.

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