Due to high visibility in RH’s (RH) earnings, we have considered the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ EPS (earnings per share) estimates for the next four quarters.
RH’s forward PE multiple
Management took initiatives to optimize its inventory and announced a new $700 million share repurchase program. Also, RH stock was upgraded from “hold” to “buy” by Deutsche Bank, which increased investors’ confidence, RH’s stock price, and its PE multiple. As of July 6, 2017, RH was trading at PE multiple of 33.0x—compared to 24.4x before the announcement of its 1Q17 earnings.
In the above graph, you can see that RH is trading at higher forward PE multiple than its peers. Higher comparable brand sales and improving margins allowed the company to trade at a higher forward PE multiple. On July 6, 2017, RH’s peers Williams-Sonoma (WSM) and Bed Bath & Beyond (BBBY) were trading at 13.1x and 7.4x, respectively.
To drive its sales, RH published a new RH Modern sourcebook in May 2017. It has been focusing on rolling out an integrated food and beverage experience at its galleries under RH Hospitality. All of these initiatives are expected to increase RH’s expenditure. If the initiatives don’t generate expected sales, the increased expenses are expected to put pressure on RH’s margins and lower its earnings.
For the next four quarters, analysts expect RH’s EPS to rise 43.1%, which might have been incorporated in company’s stock price. If RH’s earnings are lower than analysts’ estimates, selling pressure could lower RH’s stock price and its forward PE multiple.
You can mitigate these company-specific risks by investing in the SPDR S&P Homebuilders ETF (XHB), which has invested more than 23% of its holdings in home improvement retailers.
Next, we’ll look at analysts’ recommendations and their target price.