RH Soars 17% As 2Q Profit Surprises

Shares of RH are surging over 17% in pre-market trading after the luxury retailer topped 2Q estimates. RH reported adjusted earnings of $4.90 per share, higher than analysts’ expectations of $3.41 per share. Its revenues of $709.3 million came ahead of Street estimates of $707.14 million.

RH’s (RH) 2Q revenues grew marginally by 0.4% year-over-year, while earnings jumped 53% over the same period on the back of higher gross and operating margins. The company’s investments to elevate RH brands pushed up the margins. Despite the pandemic-led store closures, the company’s total demand grew 16% and core demand rose 24% year-over-year.

RH’s CEO Gary G. Friedman said in a letter to shareholders “We expect revenues to lag demand by 5 to 10 points in the third quarter and begin to normalize in the fourth quarter as manufacturing and inventory receipts catch up to demand.”

The company updated its long-term targets. It expects net revenue growth of 8% to 12% in the long term and expects adjusted operating margins in the low- to- mid-twenties. (See RH stock analysis on TipRanks).

On Sept. 3, JP Morgan analyst Tami Zakaria raised the price target to $370 (15.2% upside potential) from $310 and maintained a Buy rating. Zakaria said she expected positive high single-digit to low-teens sales growth for 2Q. The analyst anticipated a more moderate low single-digit percentage growth given management’s commentary that 2Q sales will lag demand by 10%-12% as it chases inventory. Looking ahead, she has a positive outlook for the second half and believes there could be potential margin upside to support the new price target valuation.

Currently, the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 5 Buys and 2 Holds. The average price target of $343.14 implies upside potential of about 6.9% to current levels. Shares have gained about 50.4% year-to-date.