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RH Q1 Loss Wider Than Expected, Revenues Decrease Y/Y

RH RH shares plunged 10.7% in the after-hours trading session on Jun 13 after it reported tepid earnings for first-quarter fiscal 2024 (ended May 4, 2024).

The top line marginally surpassed the Zacks Consensus Estimate but the bottom line significantly missed the same. Both the metrics declined on a year-over-year basis.

While RH expects business conditions to remain challenging until interest rates ease and the housing market begins to rebound, it expects demand trends to accelerate throughout fiscal 2024.

Earnings, Revenue & Margin Discussion

The company reported an adjusted loss of 40 cents per share, which missed the consensus mark of a loss of 8 cents by a whopping 400%. Importantly, the reported figure also decreased from the year-ago period’s earnings of $2.21 per share.

RH Price, Consensus and EPS Surprise

RH Price, Consensus and EPS Surprise
RH Price, Consensus and EPS Surprise

RH price-consensus-eps-surprise-chart | RH Quote

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Adjusted net revenues of $727 million slightly came ahead of the consensus mark of $725 million but fell 1.7% on a year-over-year basis. Demand was up 3% in the quarter, slightly below the guided range due to interest rates exceeding 7% post the hawkish Fed’s commentary throughout April.

Gross margin contracted 350 basis points (bps) to 43.5% in the reported quarter. Adjusted selling, general & administrative expenses increased 490 bps to 37% of total revenues.

Adjusted operating margin contracted 840 bps year over year to 6.5%. Adjusted EBITDA declined 39.2% year over year to $89.1 million for the quarter. Adjusted EBITDA margin also contracted 750 bps year over year to 12.3%.

Balance Sheet & Cash Flow

At the first quarter of fiscal 2024-end, RH’s cash, cash equivalents and restricted cash were $101.8 million compared with $123.7 million at the end of fiscal 2023. The company ended first-quarter fiscal 2024 with merchandise inventories worth $802.2 million compared with $754.1 million at the end of fiscal 2023.

RH ended the quarter with a net debt of $2.38 billion and a net debt-to-adjusted EBITDA ratio of 4.8x.

Net cash provided by operating activities was $56.1 million in first-quarter fiscal 2024 compared with $86.7 million in the year-ago period. Free cash flow totaled negative $10.13 million in fiscal first quarter versus $52.55 million a year ago.

Adjusted capital expenditures for the reported period were $75.04 million compared with $43.8 million a year ago.

Guidance

For fiscal 2024, RH expects demand growth of 12-14% and revenue growth of 8-10% year over year. It also projects an adjusted operating margin in the range of 13-14% and an adjusted EBITDA margin between 18% and 19%.

RH is forecasting to end fiscal 2024 with an increased backlog of $110-$130 million as revenues lag demand throughout 2024. This will negatively impact the adjusted operating and EBITDA margin by approximately 140 bps for the year. Additionally, investments and startup costs to support its international expansion are estimated to be approximately 200 bps for 2024.

For the fiscal second quarter, RH expects demand to grow in the range of 9-10% and revenues to rise in the band of 3-4%. It anticipates an adjusted operating margin in the band of 11-12% and an adjusted EBITDA margin in the 17-18% range.

Zacks Rank & Stocks to Consider

RH currently carries a Zacks Rank #4 (Sell).

We have highlighted three better-ranked stocks from the Zacks Consumer Staple sector, namely Freshpet, Inc. FRPT, Vital Farms, Inc. VITL and PepsiCo Inc. PEP.

Freshpet, a pet food company, has a trailing four-quarter earnings surprise of 118.2%, on average. FRPT currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings indicates growth of 24.8% and 177.1%, respectively, from the prior-year reported level.

Vital Farms offers a range of produced pasture-raised foods. VITL currently sports a Zacks Rank of 1. It has a trailing four-quarter earnings surprise of 102.1%, on average.

The consensus estimate for Vital Farms’ current financial-year sales and earnings per share indicates growth of 22.5% and 59.3%, respectively, from the year-ago reported figures.

PepsiCo, a leading global food and beverage company, currently carries a Zacks Rank #2 (Buy). PEP has a trailing four-quarter earnings surprise of 5.1%, on average.

The Zacks Consensus Estimate for PEP’s current financial-year sales and earnings indicates growth of 3.4% and 7.1%, respectively, from the year-earlier actuals.

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PepsiCo, Inc. (PEP) : Free Stock Analysis Report

Freshpet, Inc. (FRPT) : Free Stock Analysis Report

RH (RH) : Free Stock Analysis Report

Vital Farms, Inc. (VITL) : Free Stock Analysis Report

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