RH (RH 151.25, +32.52, +27.39%), formerly known as Restoration Hardware, is trading
sharply higher today after reporting some big upside Q1 (Apr) earnings results
and guidance last night.
RH is a luxury retailer in home furnishings. It offers merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. RH positions its Galleries as showrooms for its brand, while its Source Books and websites act as virtual extensions of its stores. In 2016, RH acquired WaterWorks, a luxury bath and kitchen brand. The deal not only better positions RH as a key player in the bath and kitchen, it also created the first fully integrated luxury home platform in the world.
In Q1 (Apr), non-GAAP EPS jumped to $1.33 from just $0.05 in the prior year period. This was well above prior guidance of $0.95-1.05. Revenue fell 0.8% year/year to $557.4 mln, which was on the lower end of prior guidance of $555-565 mln. Comparable brand revenue grew 1% in the quarter, despite a 4 point drag from cycling last year's inventory reduction efforts. Adjusted for last year's inventory reduction efforts, comparable brand revenue increased 5% vs a 9% increase last year.
The guidance for Q2 (Jul) was impressive as well as RH sees non-GAAP EPS of $1.70-1.77, which is much better than market expectations. Adjusted revenue is expected to come in around $655-662 mln, which is also above market expectations although by a more modest amount.
In 2016, RH embarked on a transformation in part by switching its business from a promotional to a membership model. RH is focusing on positioning its brand around product instead of price and constant promotions. It also redesigned its supply chain network, rationalizing its product offering, and transitioning inventory into fewer facilities. The company also launched RH Modern, RH Teen, and RH Hospitality. It redesigned its Source Book and rolled out Design Ateliers across its retail Galleries.
RH says it will continue to focus on executing its new business model while decreasing inventory and capital spending. RH expects revenue to accelerate in Q2 (Jul) and through 2H18 as the company cycles last year's inventory optimization efforts. Additionally, the new RH Interiors and RH Modern Source Books have been arriving in customer's homes over the past several weeks. RH expects to benefit from the introduction of several innovative new collections, such as RH Interiors in the Spring and RH Modern in the Fall.
As mentioned above, the EPS upside in AprQ was huge while revenue was at the lower end of guidance. Management makes it clear it will manage the business with a bias for earnings growth and not revenue growth. RH will restrain itself from chasing low quality sales at the expense of profitability like many in the industry.
RH says it has witnessed the failures of high growth as a result of endless promotions, free shipping, and a shrinking store base is resulting in broken and unsustainable retail models. This leads to no profit, online pure plays, and the declining operating margins of traditional retailers who are driving an unnatural shift online. RH says the complexities and costs of scaling a furniture business will favor those who control their brand from concept to customer, offer an inspiring physical and digital experience, and have a superior logistics network that extends the brand into the customer's home. In fiscal 2018 RE will open four new Galleries this year in Portland (opened in March), Nashville, Yountville, and New York.
Looking ahead to 2019, RH will return to its product and brand expansion strategy, which has been on hold as RH focused on its move to membership and the architecture of its new operating platform. RH has several new brand extension plans in its development pipeline, and looks forward to unveiling them as it pivots back to growth next year. RH plans to increase its investment in RH Interior Design, with a goal of building the leading Interior Design Firm in North America.
In sum, this was a surprisingly good quarter for RH. It shows that their transformation is bearing fruit as they focus more on profits than revenue growth as they refuse to chase every low margin sales dollar. The stock has more than tripled from is September 2017 low of $44. It seems their new strategy is resonating with consumers.
- OUR VIEW
- LEARNING CENTER