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RH's Q2 Earnings & Revenues Beat Estimates, Stock Up 19%
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RH (RH - Free Report) shares rallied 18.8% in the after-hours trading session on Sept. 12 after it reported better-than-expected results for second-quarter fiscal 2024 (ended Aug. 3, 2024). The luxury home furnishings retailer surpassed expectations for both earnings and revenues, driven by resilient demand despite a tough housing market.
Product margins turned positive, thanks to the company’s ongoing investments in transforming its product lines and expanding its platform. Although growth was slower than anticipated, RH outperformed its industry by 15 to 25 points, signaling strong momentum. With North American market share growing and plans for global expansion, the company anticipates continued success in the second half of 2024.
RH’s Q2 Earnings, Revenue & Margin Discussion
The company reported adjusted earnings per share (EPS) of $1.69, which beat the consensus mark of $1.53 by 10.5%. The reported figure, however, decreased from the year-ago period’s earnings of $3.93 per share.
Net revenues of $829.7 million also came ahead of the consensus mark of $826.9 million and grew 3.6% year over year. In the fiscal second quarter, demand for RH's products increased 7% and continued to rise, finishing July with a 10% gain and August up by 12%. This demand growth is notable given the tough housing market, indicating that RH’s product and platform strategy is resonating with its high-end consumer base.
The revenue growth is somewhat lagging behind demand, as RH has identified backlogs and long lead times for special orders, which impacts when the demand is converted to revenue. This is expected to be addressed as new collections become available and backorders are cleared.
Gross margin contracted 230 basis points (bps) to 45.2% in the reported quarter. Adjusted selling, general & administrative expenses increased 620 bps to 33.5% of total revenues due to incremental advertising costs.
Adjusted operating margin contracted 850 bps year over year to 11.7%. Adjusted EBITDA declined 28% year over year to $142.6 million for the quarter. Adjusted EBITDA margin also contracted 750 bps year over year to 17.2%.
At the second quarter of fiscal 2024-end, RH’s cash and cash equivalents were $78.3 million compared with $123.7 million at the end of fiscal 2023. The company ended second-quarter fiscal 2024 with merchandise inventories worth $917.3 million compared with $754.1 million at the end of fiscal 2023.
RH ended the quarter with a net debt of $2.43 billion and a net debt-to-adjusted EBITDA ratio of 5.5x.
Net cash provided by operating activities was $67.3 million in the first six months of fiscal 2024 compared with $248.4 million in the year-ago period. Free cash flow was negative $37.9 million in the fiscal second quarter (versus $48 million a year ago) and was negative $48 million in the first six months of fiscal 2024.
Capital expenditures for the reported quarter were $49.1 million and $115.3 million during the first half of fiscal 2024.
RH’s Fiscal 2024 Guidance
For fiscal 2024, RH expects demand growth between 8% and 10%. The company anticipates revenue growth between 5% and 7%, slightly lagging in demand due to the aforementioned supply chain and backorder issues. Earlier, the company had expected demand growth of 12-14% and revenue growth of 8-10% year over year.
Adjusted operating margin is now expected to be between 11% and 12%, while adjusted EBITDA margin is forecasted to be between 17% and 18%. Earlier, the company had expected an adjusted operating margin in the range of 13-14% and an adjusted EBITDA margin between 18% and 19%.
RH expects an increased backlog in the range of $80 million-$100 million by the end of 2024, which will weigh on results but should convert into revenue in future periods. This will negatively impact adjusted operating and EBITDA margins by approximately 100 bps for the year. Additionally, investments and startup costs to support international expansion are now estimated to be an approximate 230 bps drag for 2024.
Fiscal Q3 Guidance of RH
Demand growth is expected to be between 12% and 14%, and revenue growth between 7% and 9%. Adjusted operating margin is forecasted to be in the range of 15%-16%, and adjusted EBITDA margin is expected to be between 21% and 22%, reflecting a strong rebound from earlier in the year.
Other Updates
Product Transformation: RH is undergoing what it describes as the most prolific product transformation in its history. This includes the launch of the RH Interiors Sourcebook, which was mailed to consumers in mid-July through mid-August. The sourcebook contains new collections that have driven industry-leading demand growth. RH has strategically consolidated its RH Contemporary collections into the RH Interiors and RH Modern books to streamline marketing efforts, allowing the company to cut through market noise.
RH’s product refresh is expected to drive sustained demand into the fiscal third and fourth quarters of 2024, with an additional mailing of the RH Modern Sourcebook planned for November and the third mailing of the RH Interiors Sourcebook in early 2025, timed to capitalize on one of the largest furniture-selling seasons.
Platform Expansion: The company's physical retail platform continues to expand. RH is focused on opening large, immersive Design Galleries, which blur the line between retail and hospitality. The most significant expansion projects include:
RH Newport Beach (opening November 2024): It is expected to generate over $100 million in revenue annually, becoming one of RH’s flagship locations.
RH Raleigh (opening November 2024): This gallery will span 50,000 square feet and include similar amenities, including a rooftop restaurant, wine and barista bars, garden courtyards, and a design atelier.
RH Montecito (opening December 2024): A more boutique experience, this location is being developed in a historic firehouse and will include a restaurant and an intimate design atelier.
Global Expansion: RH has long-term ambitions to grow its footprint outside North America. The company is laying the foundation for global expansion, starting with new galleries in Paris and London, expected to open in 2025. Milan is planned for 2026, and these key locations are seen as major brand-building markets. RH is targeting the luxury consumer across Europe and the Middle East, positioning itself as the leading global brand for luxury home furnishings.
Texas Roadhouse has a trailing four-quarter earnings surprise of 0.4%, on average. TXRH’s shares have risen 58.7% in the past year. The Zacks Consensus Estimate for TXRH’s 2024 sales and EPS indicates 15.6% and 39.2% growth, respectively, from the year-earlier actuals.
Potbelly Corporation has a trailing four-quarter earnings surprise of 77.5%, on average. The stock has dropped 3.6% in the past year. The Zacks Consensus Estimate for PBPB’s fiscal 2024 EPS implies 33.3% growth on 6.5% lower revenues from the year-ago levels.
El Pollo Loco Holdings has a trailing four-quarter earnings surprise of 21.6%, on average. LOCO’s shares have risen 44.3% in the past year. The Zacks Consensus Estimate for LOCO’s fiscal 2024 sales and EPS indicates 2% and 12.7% growth, respectively, from the prior-year figures.
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RH's Q2 Earnings & Revenues Beat Estimates, Stock Up 19%
RH (RH - Free Report) shares rallied 18.8% in the after-hours trading session on Sept. 12 after it reported better-than-expected results for second-quarter fiscal 2024 (ended Aug. 3, 2024). The luxury home furnishings retailer surpassed expectations for both earnings and revenues, driven by resilient demand despite a tough housing market.
Product margins turned positive, thanks to the company’s ongoing investments in transforming its product lines and expanding its platform. Although growth was slower than anticipated, RH outperformed its industry by 15 to 25 points, signaling strong momentum. With North American market share growing and plans for global expansion, the company anticipates continued success in the second half of 2024.
RH’s Q2 Earnings, Revenue & Margin Discussion
The company reported adjusted earnings per share (EPS) of $1.69, which beat the consensus mark of $1.53 by 10.5%. The reported figure, however, decreased from the year-ago period’s earnings of $3.93 per share.
Net revenues of $829.7 million also came ahead of the consensus mark of $826.9 million and grew 3.6% year over year. In the fiscal second quarter, demand for RH's products increased 7% and continued to rise, finishing July with a 10% gain and August up by 12%. This demand growth is notable given the tough housing market, indicating that RH’s product and platform strategy is resonating with its high-end consumer base.
The revenue growth is somewhat lagging behind demand, as RH has identified backlogs and long lead times for special orders, which impacts when the demand is converted to revenue. This is expected to be addressed as new collections become available and backorders are cleared.
Gross margin contracted 230 basis points (bps) to 45.2% in the reported quarter. Adjusted selling, general & administrative expenses increased 620 bps to 33.5% of total revenues due to incremental advertising costs.
Adjusted operating margin contracted 850 bps year over year to 11.7%. Adjusted EBITDA declined 28% year over year to $142.6 million for the quarter. Adjusted EBITDA margin also contracted 750 bps year over year to 17.2%.
RH Price, Consensus and EPS Surprise
RH price-consensus-eps-surprise-chart | RH Quote
RH’s Balance Sheet & Cash Flow
At the second quarter of fiscal 2024-end, RH’s cash and cash equivalents were $78.3 million compared with $123.7 million at the end of fiscal 2023. The company ended second-quarter fiscal 2024 with merchandise inventories worth $917.3 million compared with $754.1 million at the end of fiscal 2023.
RH ended the quarter with a net debt of $2.43 billion and a net debt-to-adjusted EBITDA ratio of 5.5x.
Net cash provided by operating activities was $67.3 million in the first six months of fiscal 2024 compared with $248.4 million in the year-ago period. Free cash flow was negative $37.9 million in the fiscal second quarter (versus $48 million a year ago) and was negative $48 million in the first six months of fiscal 2024.
Capital expenditures for the reported quarter were $49.1 million and $115.3 million during the first half of fiscal 2024.
RH’s Fiscal 2024 Guidance
For fiscal 2024, RH expects demand growth between 8% and 10%. The company anticipates revenue growth between 5% and 7%, slightly lagging in demand due to the aforementioned supply chain and backorder issues. Earlier, the company had expected demand growth of 12-14% and revenue growth of 8-10% year over year.
Adjusted operating margin is now expected to be between 11% and 12%, while adjusted EBITDA margin is forecasted to be between 17% and 18%. Earlier, the company had expected an adjusted operating margin in the range of 13-14% and an adjusted EBITDA margin between 18% and 19%.
RH expects an increased backlog in the range of $80 million-$100 million by the end of 2024, which will weigh on results but should convert into revenue in future periods. This will negatively impact adjusted operating and EBITDA margins by approximately 100 bps for the year. Additionally, investments and startup costs to support international expansion are now estimated to be an approximate 230 bps drag for 2024.
Fiscal Q3 Guidance of RH
Demand growth is expected to be between 12% and 14%, and revenue growth between 7% and 9%. Adjusted operating margin is forecasted to be in the range of 15%-16%, and adjusted EBITDA margin is expected to be between 21% and 22%, reflecting a strong rebound from earlier in the year.
Other Updates
Product Transformation: RH is undergoing what it describes as the most prolific product transformation in its history. This includes the launch of the RH Interiors Sourcebook, which was mailed to consumers in mid-July through mid-August. The sourcebook contains new collections that have driven industry-leading demand growth. RH has strategically consolidated its RH Contemporary collections into the RH Interiors and RH Modern books to streamline marketing efforts, allowing the company to cut through market noise.
RH’s product refresh is expected to drive sustained demand into the fiscal third and fourth quarters of 2024, with an additional mailing of the RH Modern Sourcebook planned for November and the third mailing of the RH Interiors Sourcebook in early 2025, timed to capitalize on one of the largest furniture-selling seasons.
Platform Expansion: The company's physical retail platform continues to expand. RH is focused on opening large, immersive Design Galleries, which blur the line between retail and hospitality. The most significant expansion projects include:
RH Newport Beach (opening November 2024): It is expected to generate over $100 million in revenue annually, becoming one of RH’s flagship locations.
RH Raleigh (opening November 2024): This gallery will span 50,000 square feet and include similar amenities, including a rooftop restaurant, wine and barista bars, garden courtyards, and a design atelier.
RH Montecito (opening December 2024): A more boutique experience, this location is being developed in a historic firehouse and will include a restaurant and an intimate design atelier.
Global Expansion: RH has long-term ambitions to grow its footprint outside North America. The company is laying the foundation for global expansion, starting with new galleries in Paris and London, expected to open in 2025. Milan is planned for 2026, and these key locations are seen as major brand-building markets. RH is targeting the luxury consumer across Europe and the Middle East, positioning itself as the leading global brand for luxury home furnishings.
RH Zacks Rank
RH currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
Some better-ranked stocks in the Zacks Retail-Wholesale sector include Texas Roadhouse, Inc. (TXRH - Free Report) , Potbelly Corporation (PBPB - Free Report) and El Pollo Loco Holdings, Inc. (LOCO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Texas Roadhouse has a trailing four-quarter earnings surprise of 0.4%, on average. TXRH’s shares have risen 58.7% in the past year. The Zacks Consensus Estimate for TXRH’s 2024 sales and EPS indicates 15.6% and 39.2% growth, respectively, from the year-earlier actuals.
Potbelly Corporation has a trailing four-quarter earnings surprise of 77.5%, on average. The stock has dropped 3.6% in the past year. The Zacks Consensus Estimate for PBPB’s fiscal 2024 EPS implies 33.3% growth on 6.5% lower revenues from the year-ago levels.
El Pollo Loco Holdings has a trailing four-quarter earnings surprise of 21.6%, on average. LOCO’s shares have risen 44.3% in the past year. The Zacks Consensus Estimate for LOCO’s fiscal 2024 sales and EPS indicates 2% and 12.7% growth, respectively, from the prior-year figures.