William Blair Dives in on Restoration Hardware Holdings Inc (RH) Following 3Q Print


Restoration Hardware Holdings Inc (NYSE:RH) yielded a third-quarter earnings beat on December 8th that has William Blair analyst Daniel Hofkin bullish on the stock despite some rising pressures that has led to a full year-2016 guidance cut. With confidence that a significant rebound for 2017 is forthcoming, the analyst reiterates an Outperform rating on shares of RH without listing a price target.

For the third quarter, RH reported adjusted EPS of $0.20 that outclassed the analyst’s and consensus projections calling for $0.16. Total revenues rose 3% to $549 million, outperforming Hofkin’s estimate of $522 million, as well as consensus expectations of $528 million and the guidance range of $520 million to $530 million. Adjusted operating margins of 3.3% slightly hit above the consensus estimate of 3.0% thanks to SG&A expense rate favorability.

While the beat could have been even stronger, the company has confronted a challenging year with softer than anticipated demand. With declining sales trends into the fourth quarter, which the analyst attributes to “consumer distraction around the election,” it is apparent that this year has not been RH’s strong suit.

The RH management team considerably reduced its full-year 2016 adjusted EPS guidance from $1.60 to $1.80 down to $1.19 to $1.29. Meanwhile, revenue guidance also was reigned in down to $2.11 billion to $2.14 billion, or cut from 1% to 3% growth to 0% to 1% year-over-year growth. For the fourth quarter, RH is calling for adjusted EPS of $0.60 top $0.80, coming up short in comparison to consensus incoming expectations of $1.08 and the analyst’s incoming projection of $1.05. Revenue guidance also is a weak spot for RH with a range of $562 million to $592 million, compared to incoming consensus of $637 million and the analyst’s $620 million incoming forecast.

However, Hofkin maintains optimistic as a 2017 comeback is likely just around the corner for the company. The analyst asserts, “Clearly 2016 has been a painful year, with results hurt significantly by catch-up investment spending on the supply chain and the customer experience. Moreover, the company’s planning and execution around the RH Modern launch and sourcebook production/mailings arguably could have been much better. Still, we believe that the appeal of the company’s merchandise and the effectiveness of its galleries, website, and sourcebooks remain strong. We continue to expect 2017 to show a meaningful rebound in sales and margins […] and free cash flow is expected to turn positive.”

Ultimately, “We recognize that the shares may mark time until sales trends improve further, although at the current valuation […] shares offer an attractive risk/reward for intermediate- to long-term investors, in our view, given the growth potential of the franchise,” Hofkin concludes.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Daniel Hofkin is ranked #571 out of 4,273 analysts. Hofkin has a 67% success rate and gains 13.2% in his annual returns. When recommending RH, Hofkin earns 0.9% in average profits on the stock.

TipRanks analytics exhibit RH as a Hold. Out of 9 analysts polled in the last 3 months, 2 are bullish on Restoration stock and 7 remain sidelined. With a return potential of nearly 33%, the stock’s consensus target price stands at $42.33.