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Why RH Stock Fell after Q2 Beat, Upbeat Guidance

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  • RH stock was trading 3.1% lower in after-hours trading. Short-term challenges remained a drag.
  • The company beat analysts’ second-quarter estimates and raised the fiscal outlook.

RH posted stronger-than-expected second-quarter results after the markets closed on Tuesday. Besides beating analysts’ estimates on both the sales and earnings front, the company also increased its fiscal EPS outlook.

In general, the company’s strong quarterly performance and higher guidance should drive the stock higher. However, that wasn’t the case with RH. The stock was trading 3.1% lower in after-hours trading following the second-quarter results.

Analysts expect the company to be weak in the third quarter on the sales and margins front, which pressures the stock. RH’s net revenues increased about 9% in the first half of 2019. However, management expects the growth rate to slow down to 5%–6% in the third quarter.

The expected sequential deceleration didn’t sit well with investors. Management stated that a planned exit from underperforming businesses and closing a 500,000 square-foot distribution center could remain a drag.

Meanwhile, the company’s margins will likely take hit from lower sales and higher advertising costs. The company’s adjusted gross margins will likely be 40.1%–40.4% in the third quarter. Notably, RH posted an adjusted gross margin of 40.7% during the third quarter of 2018.

Barring short-term headwinds, RH will likely sustain the sales and earnings growth momentum. The company raised its fiscal 2019 adjusted EPS guidance. Moreover, the company maintained its long-term revenue growth target of 8%–12%.

RH beats analysts’ Q2 estimates

RH posted net revenues of $706.5 million, which increased 10.3% YoY (year-over-year) and beat analysts’ estimate of $697.8 million. On an adjusted basis, the second-quarter revenues rose 9.9% YoY. The company’s top line gained from new galleries’ stellar performance, especially RH New York. Accelerated outlet sales, shipping efficiencies, and lower returns also supported the top-line growth.

RH’s adjusted gross margin expanded by 40 basis points to 42.0%. Meanwhile, the adjusted operating margin expanded by 320 basis points to 14.9%.

Stellar sales and margin expansion drove the company’s bottom line higher, which beat analysts’ estimate by a wide margin. RH posted an adjusted EPS of $3.20, which rose about 59% YoY and beat analysts’ estimate of $2.70. Notably, share repurchases also cushioned the company’s bottom line.

In comparison, Lowe’s (LOW) and Home Depot (HD) beat analysts’ earnings estimates in the second quarter. Lowe’s beat analysts’ expectations due to strong demand and strength in the paint and professional customers business. The company’s bottom line also gained from share buybacks.

Meanwhile, Home Depot beat analysts’ EPS estimate by a wide margin. The company posted an adjusted EPS of $3.17 in the second quarter, which beat analysts’ estimate of $3.08.

Updated outlook

RH expects its adjusted revenues to be $2.680 billion–$2.694 billion—up from $2.658 billion–$2.674 billion.

The company’s adjusted EPS will likely be $10.53–$10.76—up from the previous guidance of $9.08–$9.52.

A strong second-quarter performance and upbeat outlook led a few analysts to raise their target price on RH stock. Cowen increased its target price to $155 from $135. J.P. Morgan increased its target price to $180 from $156.

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