Restoration Hardware (RH) Down 10% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Restoration Hardware (RH). Shares have lost about 10% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Restoration Hardware due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

RH Q2 Earnings Beat Estimates, Ups '21 View on Solid Demand

RH reported stellar results for second-quarter fiscal 2021 (ended Jul 31, 2021) on the back of solid demand. Both adjusted earnings and revenues handily beat the Zacks Consensus Estimate. All key metrics grew significantly on a year-over-year basis.

The upsurge is mainly backed by strong demand buoyed by solid momentum in the housing market, given the migration of consumers to larger suburban and second homes. The company highlighted that this trend is resulting in substantial square footage growth, thereby driving accelerated furniture and furnishings demand. Additionally, historically low-interest rates, a record stock market, reopening of several large parts of the economy and elevated home spending are added tailwinds.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $8.48 per share surpassed the consensus mark of $6.58 by 28.9% and increased a whopping 73% from the year-ago figure of $4.90.
Net revenues of $989 million improved a notable 39% year over year and topped the consensus mark of $957 million by 1.7%.

Adjusted gross margin expanded 180 basis points (bps) to 49.3% for the quarter. Adjusted SG&A contracted 290 bps to 22.8%.

Adjusted operating margin expanded a notable 480 bps year over year to 26.6%. Adjusted EBITDA spiked 56.3% year over year to $290.4 million for the quarter. Adjusted EBITDA margin also expanded 320 bps year over year to 29.4%.

Store Update & Balance Sheet

As of Jul 31, RH operated 66 RH Galleries and 38 RH outlet stores in 30 states, the District of Columbia and Canada as well as 14 Waterworks showrooms throughout the United States and U.K., and had sourcing operations in Shanghai as well as Hong Kong.

RH’s cash and cash equivalents were $291.5 million at fiscal second quarter-end compared with $100.4 million on Jan 30, 2021 and $17.4 million a year ago. The company ended the quarter with merchandise inventories worth $646 million compared with $544.2 million at fiscal 2020-end and $487.6 million a year ago.

Net cash used in operating activities was $316.7 million for the first six months of fiscal 2021 compared with $128.3 million in the comparable year-ago period. Free cash flow totaled $94.5 million at fiscal second quarter-end versus $217.6 million a year ago.

Raised Fiscal 2021 View

Solid housing and renovation market momentum, a record stock market, low-interest rates, reopening of several large parts of the economy combined with the recent acceleration in RH demand trends are expected to contribute to the company’s fiscal 2021 results.

Backed by solid business trends, RH once again raised its fiscal 2021 guidance. The company now expects fiscal 2021 revenues to grow 31-33% versus the prior guided range of 25-30%. Adjusted operating margin is now anticipated within 24.9-25.5%, indicating growth of 310-370 bps from the year-ago figure of 21.8%. The metric was earlier expected within 23.5-24.3%. Return on invested capital is expected to be 70% versus the earlier expectation of more than 60% for fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 13.44% due to these changes.

VGM Scores

Currently, Restoration Hardware has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Restoration Hardware has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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