RH Moves Up On Results And Outlook
RH (NYSE: RH) has staged a stunning recovery over the past year. The business is perfectly positioned to capture trends within the home building and construction industries as well as home furnishings and lifestyle, trends that have many years to run. The second-quarter results were not only strong but came with the second increase to guidance this year, a move that has price action up in the premarket trading. Based on the results, the outlook, and the high 13% short interest we see the makings of a short squeeze that could send this stock up by double digits. And that's just in the near term, the longer-term outlook is robust and could see this stock double in price.
RH Beat Consensus And Guides Higher
RH’s results are good enough but it is the guidance that has the stock moving higher. The $988.86 million in consolidated revenue is up 39.4% over last year and beat the consensus by 170 basis points, good but average in today’s market. Over the past two years, growth is also up 40% due to the slight downtick in the business seen last year. RH, due to its unique positioning at the nexus of Home Building and Home Decor experienced a slowdown in business but not a contraction of business during the second quarter of last year.
Moving down the report, the details only get better. The company matched its increase in revenue with an increase in the margin at both the gross and operating levels. The GAAP gross margin increased by 240 basis points while the adjusted gross margin increased 180 basis points helping to drive a 590 basis point and 480 basis point increase and GAAP and adjusted operating margin. The increase in margin helped drive solid results on the bottom line as well, with GAAP earnings of $7.09 beating the consensus by $0.68 and growing 130% over the past year. On an adjusted basis, the $8.48 reported beat the consensus by $1.99 but there is an offsetting factor to be aware of.
“This year’s adjusted net income benefited from an unusually low tax rate of 1.3% versus 16.1% a year ago due to an increase of stock options exercised in the quarter and the nearly 3x increase in our average stock price. If our tax rate in the second quarter was comparable to last year, adjusted diluted earnings per share would have been $7.21, an increase of 47% versus $4.90 in the second quarter of 2020.”
Turning to the guidance, the company has raised its guidance for the second time this fiscal year and now expects revenue in the range of up 31% to up 33% versus the prior range of up 25% to 30%. The guidance is also coupled with an expectation for widening margin in the back half of the year which will help drive earnings growth. The risk is that supply chain issues and disruptions in manufacturing in Vietnam are delaying the release of the fall catalog and that may hamper results this quarter. Regardless, the company's current offerings are in high demand so we expect business to remain at least steady until the disruptions are overcome. That is expected early in the 4th quarter.
The Analysts Are Happy With RH Results
Marketbeat data on RH shows the analysts are bullish on RH and getting more so in the wake of the earnings release. There have been at least six sell-siders to come out with positive comments and all have increased their price targets. The broad consensus assumes RH is fairly valued near $675 but the trend of revisions is upward and the most recent 6 have the stock trading closer to $775 or about 15% upside from current price action.
The Technical Outlook: RH Could Break From A Bullish Triangle
Price action in RH has been consolidating over the past few months. The consolidation is at the top of an extended and strong rally that we think will lead to further upside. The most recent price action smacks of a bullish triangle that, if confirmed, would point to a continuation of the trend and a minimum movement of $200 to $300. That puts the stock at $875 to $975 or about 30% upside at the low end of the range. With the short interest so high, the first leg of the move could happen rather quickly. Our trigger would be a move above resistance at the $725 level.
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