Skip to Content
Stock Analyst Update

Solid Performance From RH, but Shares Pricey

While we expect healthy operating margin gains in 2018, we operating margins will approach 10% over our long-term outlook.

Mentioned:

No-moat  RH (RH) reported third-quarter results that were roughly in line with its November update, calling for sales of $592 million and EPS of $1.03, above the company’s initial take in September. Sales of $592 million and EPS of $1.04 were supported by store sales growth of 12% and a direct-to-consumer sales rise of 3%, with same-store sales ticking up 6% on top of a 6% decline in the year-ago period. We recently reevaluated our long-term thesis on RH after its investor day. While our outlook for home furnishing and housing demand is unchanged, the firm’s change to its business model has likely placed it on track to reach higher operating margins than we previously modeled (at just below 10% versus 8.5% prior).

At the time, we raised our fair value estimate to $81 from $53 per share after incorporating lower capital expenditures (accounting for $14 of the increase), better near-term performance (adding $5 to our prior fair value estimate), and operating efficiencies ahead (fewer distribution centers to manage, improved SKU management), leading to operating margin expansion (providing the remainder of the hike). With the fourth quarter outlook unchanged ($655 million-$680 million in revenue and $1.31-$1.51 in EPS) we don’t plan any material change to our $81 fair value estimate and still view shares as pricey, trading at 18 times our tax-adjusted 2018 EPS estimate.

Gross margin performance in the quarter was solid, expanding 460 basis points to 36.9% after contracting 440 basis points in third-quarter 2016, lapping the SKU rationalization that was undertaken in 2016. The SG&A ratio was a bit better than we anticipated, at 28.8%, ticking down a modest 20 basis points, but still inflated from 2015 levels as the company reinvests in improving the supply chain. While we expect healthy operating margin gains in 2018, with RH returning to more normalized levels, we expect gains to moderate thereafter, with operating margins reaching about 10% over our long-term outlook.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.