Why Is Restoration Hardware (RH) Down 14.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Restoration Hardware (RH). Shares have lost about 14.9% 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 drivers.

RH Beats on Q3 Earnings, Ups '21 View on Solid Demand

RH reported stellar results for third-quarter fiscal 2021 (ended Oct 30, 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.

For fiscal 2022, RH remains optimistic about various actions by the company during the period. These include the introduction of RH Contemporary, the elevation and expansion of RH Interiors and RH Modern, the launch of Global Expansion with the opening of RH England, the opening of the company’s first RH Guesthouse in New York, the inauguration of The World of RH, the lift off of RH1 & RH2, and many more.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $7.03 per share surpassed the consensus mark of $6.68 by 5.2% and increased 13.4% from the year-ago figure of $6.20.

Net revenues of $1,006 million improved a notable 19.1% year over year and topped the consensus mark of $986 million by 2.1%.

Adjusted gross margin expanded 180 basis points (bps) to 50.2% for the quarter. Adjusted SG&A contracted 70 bps to 22.5%.

Adjusted operating margin expanded a notable 100 bps year over year to 27.7%. Adjusted EBITDA spiked 20.4% year over year to $310.7 million for the quarter. Adjusted EBITDA margin also expanded 40 bps year over year to 30.9%.

Store Update & Balance Sheet

As of Oct 30, RH operated 66 RH Galleries and 38 RH outlet stores as well as 14 Waterworks showrooms.

RH’s cash and cash equivalents were $2,199 million at fiscal third quarter-end compared with $100.4 million on Jan 30, 2021 and $89.9 million a year ago. The company ended the quarter with merchandise inventories worth $633.6 million compared with $544.2 million at fiscal 2020-end and $497.1 million a year ago.

Net cash used in operating activities was $533.7 million for the first nine months of fiscal 2021 compared with $347.3 million in the comparable year-ago period.

Free cash flow totaled $145.3 million at fiscal third quarter-end versus $194.8 million a year ago. That said, the metric increased to $379.9 million for the first nine months of 2021 from the year-ago level of $275.5 million.

Raised Fiscal 2021 View

The company provided a conservative view of revenues for the fiscal fourth quarter, given uncertainties arising from the new virus variant, the postponed opening of RH’s new San Francisco Gallery until Spring, and continued shipping and port delays.

Nonetheless, backed by a solid operational model, RH raised its fiscal 2021 guidance for the third time this year. The company now expects fiscal 2021 revenues to grow 32-33% versus the prior guided range of 31-33%. Adjusted operating margin is now anticipated within 25.3-25.5%, indicating growth of 350-370 bps from the year-ago figure of 21.8%. The metric was earlier expected within 24.9-25.5%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Restoration Hardware has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Restoration Hardware has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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