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RH Stock Rallies Almost 60% YTD: Is There More Room to Run?
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RH (RH - Free Report) has been riding high on focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants as well as cafes) in new galleries.
Shares of this leading luxury retailer in the home furnishing space have advanced 59.7% year to date, faring much better than the Zacks Retail - Home Furnishings industry’s 50.1% rally. Although rising raw material and freight prices are concerns, RH has been showing strong execution, given strength in the multi-channel platform and membership model. The price performance was also backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing 14 quarters.
Focus on Margin Expansion: RH expects persistent improvement in operating margins as a result of its focus on a number of strategic initiatives going forward that include: (i) occupancy leverage that it expects to gain from real estate transformation (ii) product margin expansion as it continues to drive full price selling in core business and (iii) cost savings from improvements of operating platform and organizational structure.
For first-quarter fiscal 2021, adjusted gross margin expanded 550 basis points (bps) to 47.3%. Adjusted operating margin also expanded a notable 1,260 bps year over year to 22.6%. Adjusted EBITDA margin expanded 1,050 bps year over year to 26.5%.
Improving Industry Backdrop: Booming real estate activity in second home markets, an accelerated shift of families to larger suburban homes and an uptick in homebuilding should drive increased spending in the markets served by RH. The company has been benefiting from a favorable housing backdrop, solid repair & remodeling activities as well as growth initiatives. Net revenues of $860.8 million for the last reported quarter improved a notable 78% year over year.
Solid Prospects: The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2021 earnings of $22.88 per share, which indicates 28.3% year-over-year growth. RH is a great pick in terms of value investment, supported by a Growth Score of A.
Also, it has a solid VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics.
Upbeat 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 full-year results. Backed by solid business trends, RH expects fiscal 2021 revenues to grow 25-30%. Adjusted operating margin is anticipated within 23.5-24.3%, indicating growth of 170-250 bps from the year-ago figure of 21.8%. ROIC is expected in excess of 60% for fiscal 2021.
For the fiscal second quarter, it expects revenue growth in the range of 35-37% and adjusted operating margin within 25.9-26.1%.
Superior ROE: RH has a very strong return on equity (ROE) that is indicative of its growth potential. The company’s ROE currently stands at 156.9%. This compares favorably with ROE of 36.4% for the industry it belongs to. This indicates efficiency in using shareholders’ funds and its ability to generate profit with minimum capital usage.
Concerns
Rising raw materials costs and freight expenses are growing concerns for RH as well as other companies like Ethan Allen Interiors Inc. (ETH) , Tempur Sealy International, Inc. (TPX - Free Report) , and Williams-Sonoma, Inc. (WSM - Free Report) in the same industry. Delay in manufacturing, low inventory and supply chain disruptions are near-term headwinds.
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RH Stock Rallies Almost 60% YTD: Is There More Room to Run?
RH (RH - Free Report) has been riding high on focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants as well as cafes) in new galleries.
Shares of this leading luxury retailer in the home furnishing space have advanced 59.7% year to date, faring much better than the Zacks Retail - Home Furnishings industry’s 50.1% rally. Although rising raw material and freight prices are concerns, RH has been showing strong execution, given strength in the multi-channel platform and membership model. The price performance was also backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing 14 quarters.
Image Source: Zacks Investment Research
Let’s take a look at the factors supporting growth of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Major Growth Drivers
Focus on Margin Expansion: RH expects persistent improvement in operating margins as a result of its focus on a number of strategic initiatives going forward that include: (i) occupancy leverage that it expects to gain from real estate transformation (ii) product margin expansion as it continues to drive full price selling in core business and (iii) cost savings from improvements of operating platform and organizational structure.
For first-quarter fiscal 2021, adjusted gross margin expanded 550 basis points (bps) to 47.3%. Adjusted operating margin also expanded a notable 1,260 bps year over year to 22.6%. Adjusted EBITDA margin expanded 1,050 bps year over year to 26.5%.
Improving Industry Backdrop: Booming real estate activity in second home markets, an accelerated shift of families to larger suburban homes and an uptick in homebuilding should drive increased spending in the markets served by RH. The company has been benefiting from a favorable housing backdrop, solid repair & remodeling activities as well as growth initiatives. Net revenues of $860.8 million for the last reported quarter improved a notable 78% year over year.
Solid Prospects: The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2021 earnings of $22.88 per share, which indicates 28.3% year-over-year growth. RH is a great pick in terms of value investment, supported by a Growth Score of A.
Also, it has a solid VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics.
Upbeat 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 full-year results. Backed by solid business trends, RH expects fiscal 2021 revenues to grow 25-30%. Adjusted operating margin is anticipated within 23.5-24.3%, indicating growth of 170-250 bps from the year-ago figure of 21.8%. ROIC is expected in excess of 60% for fiscal 2021.
For the fiscal second quarter, it expects revenue growth in the range of 35-37% and adjusted operating margin within 25.9-26.1%.
Superior ROE: RH has a very strong return on equity (ROE) that is indicative of its growth potential. The company’s ROE currently stands at 156.9%. This compares favorably with ROE of 36.4% for the industry it belongs to. This indicates efficiency in using shareholders’ funds and its ability to generate profit with minimum capital usage.
Concerns
Rising raw materials costs and freight expenses are growing concerns for RH as well as other companies like Ethan Allen Interiors Inc. (ETH) , Tempur Sealy International, Inc. (TPX - Free Report) , and Williams-Sonoma, Inc. (WSM - Free Report) in the same industry. Delay in manufacturing, low inventory and supply chain disruptions are near-term headwinds.