Slowing Growth And Margin Pressure Send RH Lower
RH (NYSE: RH) isn’t ailing but there are two things clear in the Q4 earnings report and subsequent conference call. The first is that growth is slowing. Growth is slowing from the very high 78% YOY pace set in Q1 and it is expected to continue slowing through the end of fiscal 2022. The second is that inflation is taking a toll on discretionary spending the company is more than worried. To put it simply, RH CEO Gary Friedman is concerned inflation is going to outrun the consumer and we agree with him. Inflation is rampant, the FOMC has done so very little to fight it, and our esteemed leaders in Washington appear to be clueless about it. The bottom line is that RH shares are falling and may move down to set a new low. If you believe the economy will get better in the second half of the year, that new low might be a nice time to buy the stock.
“I just wonder if anybody (at) the Fed has picked up the phone and called a business person and said, hey, what do you think is happening with inflation? How's ocean rates? How is this? How is that? I mean, I think, I don't think anybody really understands what's coming from an inflation point of view, because either businesses are going to make a lot less money, or they're going to raise their prices. And I don't think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. It's -- and I think it's going to outrun the consumer. And I think we're going to be in some tricky space." said Mr. Friedman.
RH Falls On Mixed Quarter, Slowing Growth
RH had a good quarter but not a great one in relation to the analyst estimates. The company reported $902.74 million in revenue which is up 11.1% from last year but $28 million or 300 basis points less than expected. The good news is that revenue gains are on top of last year’s strong showing, the bad news is that growth slowed dramatically and is expected to slow further in Q1 and into the back half of the fiscal year. Moving down to the margin, margins came in better than expected but contracted on a YOY basis and are expected to contract again in 2022. This left the adjusted earnings at $5.66, up $0.58 from last year, and $0.07 better than expected but once again the outlook is calling for slowing growth.
The RH guidance is as tepid as the results with Q1 and FY revenue expected to grow but at a slower rate than the previous quarter and year and the expected growth will be slowest in the back half of the year. The Q1 guidance is expecting revenue growth in the range of 7% to 9% compared to last year’s 78% with full-year revenue growth of only 5% to 7%. This is accompanied by an expectation for a small margin improvement in Q1 but for the FY margin to be flat, not a detail to inspire investors in our opinion.
The Analysts Are Still Buying RH
The analysts are still buying into RH’s long-term outlook. The Marketbeat.com consensus rating is a firm Buy with a price target of $624. The $624 target is about 85% above the recent price action but has been coming down over the past few months. There were at least 6 analysts' commentaries in the wake of the Q4 results and all included a price target reduction. Their consensus is closer to the $515 range which is still a considerable amount of upside with shares trading at $337.
The Technical Outlook: RH Tanks But The Bottom May Be In
Shares of RH have been in a downtrend for several quarters and are carrying a very high short interest. The post-release action is bearish and confirms the downtrend but the next decline may not get very far. A bottom is in place at the $325 level that may support prices in the near to short-term. In that scenario, price action may begin to rebound if news improves and the shorts start covering but that is pure speculation. If support at the $325 level does not hold, this furniture stock may see its value cut in half so that it trades more in line with the rest of its peers.
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