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RH (NYSE:RH) Is Levered For Big Gains

RH (NYSE:RH) Is Levered For Big Gains

RH; Shifting Trends Are Driving Profits

There have been some big changes in the furniture industry over the past few years. The trade war accelerated the flight out of China, operational efficiency became a priority, and now the stage is set for big gains. Companies like RH (NYSE: RH) (formerly known as Restoration Hardware) have been able to drastically improve their margins even while business flagged putting them in a position to leverage sales growth. In the new consumer environment, the furniture industry has been rebounding strongly since the calendar 2Q shutdowns and all signs suggest it is only accelerating now.

"We believe it’s safe to assume that some level of elevated spending on the home will remain through 2021, and possibly beyond. The booming real estate activity in second-home markets, an accelerated shift of families moving to larger suburban homes, the uptick in homebuilding, and a record equity market should drive increased spending for an extended period of time as the cycle for purchasing and furnishing a home is anything but quick. We also tend to believe that the longer we remain in this new, forced reconsideration of how and where we spend our time, consumers will develop new priorities and habits that could favor home-focused businesses indefinitely."

RH Falls On Mixed Results

Shares of RH fell following the release of Q3 earnings but don’t read too much into that. The short-interest on the stock is running near 22% which is more than enough to spur near-term, knee-jerk reactions. While RH’s Q3 results are mixed, there is really nothing in the report not to like and every reason to think this stock will continue its uptrend. The top-line results came in at $844.01 million or up 24.6% from last year.

The revenue is an acceleration from the previous quarter as well and also beat the consensus target. The margin of strength may be what sent share prices falling, only 1.3% compared to much larger double-digit beats from others in the industry. On a month-to-month basis, revenue gains in the quarter edged lower from August to October but rebound nicely in the 1st month of the 4th quarter. August revenue gains were 47%, October fell to 33%, and then November rebound with a 39% increase in sales.

What makes the revenue gains so impressive is the fact the company did not send out its fall idea-book nor did it launch any new products. Savings from those decisions, cost-saving/supply-chain solutions, and the benefits of a favorable mix helped drive the gross margin to 48.4%, up from 41.7% in the prior year and 70 bps better than forecast. Moving down to the bottom line, the GAAP earnings of $1.64 missed by $3.41, pretty shocking, but the more important adjusted EPS of $6.20 beat by a dollar.

"The emergence of RH as a luxury brand generating luxury margins has arrived years sooner than expected and we now believe we will reach 21% adjusted operating margin in fiscal 2020 with revenue growth of approximately 7%. If revenues grow at a higher than forecasted rate in the fourth quarter, adjusted operating margins could expand beyond 21%, and we now see a clear path to an adjusted operating margin of 25% in the coming years."

The Technical Outlook: Consolidation At Hand, Buy On The Dips

Shares of RH made a very strong rebound from the March Vee-Bottom and are probably heading higher. The company has a respectable outlook for both revenue and earnings growth that not only support the current 26X multiple but point to rising shares prices in the coming year. The caveat is the short-interest and recent price action. In the near-term, traders and investors should expect sideways trading and price-weakness until the shorts get tired or squeezed out. Until then, use that weakness to buy on the dips.

The latest round of analysts' activity is very bullish. There have been seven analyst calls in December alone. All come from sell-siders with Very Bullish, Overweight, or Outperform ratings and included a price target upgrade. The consensus of these seven is near $535 or about an 18% upside from current price action.

RH (NYSE:RH) Is Levered For Big Gains
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Thomas Hughes
About The Author

Thomas Hughes

Contributing Author

Technical and Fundamental Analysis

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
RH (RH)
3.9158 of 5 stars
$322.77+1.5%N/A189.87Hold$331.77
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