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Why Analysts Expect RH’s Earnings to Fall in 2Q17

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Revenue estimates

For 2Q17, analysts expect RH (RH) to post EPS (earnings per share) of $0.42, which represents a fall of 4.5% from $0.44 in 2Q16. The company’s management set the EPS guidance at $0.38–$0.43 for 2Q17.

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EPS growth

Analysts expect the fall in RH’s net margins to offset the positive effect of revenue growth and share repurchases. As a result, RH’s EPS is expected to fall in 2Q17. Higher SG&A (selling, general and administrative), D&A (depreciation and amortization), and interest expenses are expected to lower the company’s net margins from 3.3% in 2Q16 to 2.3% in 2Q17. Some of the declines in its net margins are expected to be offset by redesigning the supply chain network, fewer facilities for inventories, and rationalizing product offers.

From the beginning of 3Q16 to the end of 2Q17, the company repurchased 21.12 million shares for $1 billion. Share repurchases are expected to boost the company’s EPS by lowering the number of shares outstanding. In the above graph, you can see that the company’s EPS has outperformed three times in the last five quarters. When this happens, the company’s stock price tends to rise.

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Peer comparisons and outlook

During the same period, Williams-Sonoma (WSM) posted EPS growth of 5.2%, while Bed Bath & Beyond’s (BBBY) revenue is expected to fall 14.6%.

For 2017, the company’s management has set the EPS guidance at $1.67–$1.94, which represents growth of 31.5% to 52.8%. For the next four quarters, analysts expect the company to post EPS of $1.96, which represents 43.1% growth from $1.37 in the same four quarters the previous year.

Analysts’ recommendations

Of the 20 analysts that follow RH, 10% recommend a “buy,” 85% recommend a “hold,” and 5% recommend a “sell.” On average, analysts expect RH’s stock price to reach $58.07 in the next 12 months, which represents a return potential of 19.7%.

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