Nothing is more impressive than a successful turnaround, and investors in RH (RH 5.10%) have hoped that the home furnishings retailer would be able to generate a nice comeback after a terrible 2016. 2017 has been extremely good to RH so far, and many have thought recently that the business is in a much better position to rebound than it has seen for several years.
Coming into Tuesday's fiscal third-quarter financial report, RH investors expected a big ramp-up in earnings on solid sales gains. RH's results were in line with those expectations, and even though the stock found it difficult to advance following record gains from earlier in the year, the retailer's shareholders should be happy with the company's fundamental performance. Let's take a closer look at RH and what its latest results say about its future.
Image source: RH.
RH keeps building momentum
Restoration Hardware's third-quarter results continued its streak of encouraging business strength. Sales climbed 8% to $592.5 million, roughly matching what most of those following the stock were expecting to see. Net income more than quintupled from year-ago levels, and after making adjustments for several extraordinary items, adjusted earnings of $1.04 per share matched the consensus forecast among investors in the stock.
RH was able to generate these strong results despite suffering downward pressure from Hurricanes Harvey and Irma during the quarter. The retailer estimated that it suffered about a 1% hit to sales because of the storms and lost roughly $1.3 million in adjusted net income, or about $0.05 per share. Offsetting those losses, however, was a drop in RH's effective tax rate, which more than made up for the hurricane-related hits.
Business fundamentals remained strong. The core RH segment saw comparable brand revenues rise 6%, reversing a year-ago decline in comparables. Merchandise margin improvement played a key role in lifting the figure, and investments in the RH interior design business have also paid off in conjunction with the retailer's new membership model. About 95% of RH's overall business now comes from members, showing the extent to which its transition has taken hold. Reductions in returns, exchanges, and canceled orders have also contributed to more favorable internal execution.
Perhaps what's most impressive is the way that RH is bucking the trend elsewhere in retail. Revenue from RH stores jumped 12% from year-earlier levels, compared to just 3% in direct sales via catalog and e-commerce channels. That shows how the retailer's investment in its store locations is reaping rewards, even as other retailers have looked to shrink their physical footprints and take more of their operations online. Yet RH isn't looking to expand its store count, with one new retail gallery opening during the period being offset by two closures in the Toronto area.
What's next for RH?
CEO Gary Friedman again provided context for the results. "Over the past 18 months," Friedman said, "we transformed our business from a promotional to a membership model that is enhancing our brand, streamlining our operations, and improving the customer experience." The CEO also pointed to efforts to improve its product lineup, supply chain logistics, and inventory management as helping to drive gains in internal efficiency.
Looking forward, Friedman is even more optimistic. He said that the company's new design galleries have the ability to double sales in each market, and he expects wider margins and falling costs to benefit the company. Delays in opening a new design gallery in New York until early next year are disappointing, but the move is in line with wanting to provide the perfect customer experience.
RH's guidance shows the extent of the rebound. For the fiscal fourth quarter, revenue should come in between $655 million to $680 million, resulting in adjusted net income of $37 million to $41 million. Full-year sales of $2.429 billion to $2.454 billion is a slight narrowing of RH's prior guidance range, and adjusted net income of $83 million to $87 million representing a substantial improvement of $10 million to $13 million compared to the range it provided last quarter.
Finally, RH made comments about capital allocation. Following the repurchase of about half its outstanding shares, RH has now turned its attention toward paying down debt. The retailer will emphasize buying back convertible notes in order to reduce share dilution, and the company's access to capital has improved as its fundamental business prospects have gotten better.
RH investors seemed content with the news, and the stock fell back just 2% in after-hours trading following the announcement, remaining near record levels. Much will depend on the holiday season, but RH has put itself in position to keep thriving for the foreseeable future.
