RH Gains On Multiple Factors: Here's Why It Can Scale Higher

Shares of leading home furnishings company, RH (NYSE:RH) have rallied more than 200% so far this year, breezing past the Zacks Home Furnishings industry’s gain of only 2.6%. Also, the company has outperformed the industry in each of the 4-week, 12-week and 52-week time frames, justifying the stock’s Momentum Score of A.

Also, earnings estimates have been rising over the past week, more prominently after the company raised the third quarter and fiscal 2017 guidance. This suggests that sentiments on RH are moving in the right direction and the company is poised to perform well in the quarters ahead.

Notably, over the last seven days, the Zacks Consensus Estimate for third-quarter earnings rose 10.3% to 96 cents. This reflects a year-over-year increase of 403.4%. Also, earnings estimates for the current year and next have inched up 4.9% and 12.9% respectively.

This bullish trend is why the stock boasts a Zacks Rank #2 (Buy) and why we are expecting outperformance from the company in the near term.

Let us delve deeper into the factors that might help the stock maintain the bull run.

Upbeat Guidance

RH’s adjusted earnings per share are expected in the range of $1.02 to $1.04 for the fiscal third quarter (68-80 cents expected earlier), despite a 5-cent or 1% negative impact from hurricanes Harvey and Irma. This reflects a substantial increase from the year-ago level of 20 cents. Net revenues for the quarter are likely to be about $592.5 million compared with the previous guidance of $575-$590 million. The updated guidance reflects an increase of 8% year over year despite an approximate 1% negative impact from the recent natural calamities. The Zacks Consensus Estimate for third-quarter revenues currently stands at $599.2 million, up 9.2% year over year.

RH has also raised its fourth-quarter adjusted net income guidance to $37-$41 million from the earlier $33-$37 million. For fiscal 2017, the company lifted its net income guidance to $82-$87 million from the previous $70-$77 million. RH expects fiscal 2018 net revenues between $2.58 billion and $2.62 billion, adjusted net income in the range of $125-$145 million, and free cash flow of more than $240 million.

Growth Initiatives Strong

The company’s efforts to redesign its supply chain network, rationalize product offerings and the Waterworks acquisition are expected to boost growth.

RH closed its distribution facility in Los Angeles and has plans of shutting down its distribution center in Dallas by fiscal 2017-end. Overall, with the elimination of an estimated 1.75 million square feet of distribution space, RH will generate savings of approximately $15 million annually.

Meanwhile, RH has completed around 90% of the redesign of its reverse logistics and Outlet business. The move is expected to generate cost savings and drive margin by $15 million to $20 million annually.

The company expects margins to rise and costs to fall as it plans to reduce inventory and benefit from its new operating model. RH is optimistic about meeting its long-term goal of $4-$5 billion in North American revenues and industry-leading operating margins and returns on invested capital.

Solid Value & Growth

Investors are always on the lookout for stocks that are currently undervalued but have solid growth potential. With a Value Style Score of B and a Growth Style Score of A, RH serves as a good pick. RH currently has a trailing 12 month P/S ratio of 1.2, which is below the highs scaled over the past five years and the S&P 500 average of 3.3.

Apart from these factors, we note that since RH’s products primarily focus on home furnishings so demand for its products is related to the performance of the broader housing market. New residential construction in the United States increased more than expected in October 2017, reflecting strength in the housing industry.

Positives like an improving economy, low unemployment levels, solid homebuilders’ confidence and a tight supply situation raise optimism about the housing industry’s performance in 2017. As such, demand for RH’s products is likely to rise as well, driving revenues.

Other Stocks to Consider

A few other top-ranked stocks in the Retail-Wholesale sector are Beacon Roofing Supply, Inc. (NASDAQ:BECN) , The Home Depot, Inc. (NYSE:HD) and Arcos Dorados Holdings Inc. (NYSE:ARCO) .

Beacon Roofing carries a Zacks Rank #1 (Strong Buy). Earnings are expected to increase 224% in fiscal 2018. You can see the complete list of today’s Zacks #1 Rank stocks here

Home Depot, a Zacks Rank #2 stock, is expected to see 14.1% rise in earnings in fiscal 2017.

Arcos, also a Zacks Rank #2 stock, is expected to see 16.2% rise in earnings in 2017.

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