RH Stock Before Q3 Earnings Release: To Buy or Not to Buy?

RH (RH, formerly Restoration Hardware) is scheduled to report third-quarter fiscal 2024 (ended Nov. 2) results on Dec. 12, after market close.Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.RH delivered stronger-than-expected results for the second quarter of fiscal 2024, which ended on Aug. 3, 2024. The luxury home furnishings retailer exceeded forecasts for both earnings and revenues by 10.5% and 0.3%, respectively, benefiting from steady demand despite challenges in the housing market.Product margins rebounded into positive territory, driven by the company's strategic investments in upgrading its product lines and expanding its platform. While growth was slower than projected, RH outperformed its industry peers by 15 to 25 percentage points, showcasing significant momentum. With increasing market share in North America and plans for international expansion, the company remains optimistic about its prospects for the second half of 2024.Meanwhile, RH does not have an impressive track record of surpassing earnings expectations. Its earnings exceeded the consensus mark in only one of the last four quarters and missed on three other occasions. The average surprise over this period is 148.4%, as shown in the chart below.Image Source: Zacks Investment ResearchHow Are Estimates Placed for RH?The Zacks Consensus Estimate for the fiscal third-quarter earnings per share has decreased to $2.67 from $2.68 over the past 30 days. The estimated figure indicates 735.7% growth from the year-ago reported figure. The consensus mark for revenues is $810.9 million, indicating 7.9% year-over-year growth.Image Source: Zacks Investment ResearchWhat the Zacks Model Unveils for RHOur proven model does not predict an earnings beat for RH for the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.Earnings ESP: RH has an Earnings ESP of -0.41%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.Zacks Rank: The company currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.Factors Influencing RH’s Q3 PerformanceRH’s topline is expected to have witnessed gains in market share in the fiscal third quarter due to newer and more competitively priced product collections, expanded sourcebook mailings, optimized assortment, and improved in-stock levels.The company’s fiscal third-quarter guidance, provided on Sept. 12, indicates demand to increase 12-14% year over year (resulting in the revenue growth of 7% to 9% for the quarter), up from 7% in the fiscal second quarter, supported by gains in market share. Investors should note that RH reported 12% demand growth in August, and broader high-end furniture industry trends appeared to improve in the fiscal third quarter, as noted by competitors like Arhaus, Inc. ARHS and Williams-Sonoma, Inc. WSM. Particularly, Williams-Sonoma highlighted positive trends in furniture demand, which is favorable for RH, given its furniture-heavy portfolio.New product launches and better execution of marketing initiatives and the B2B segment might have also helped mitigate some of the headwinds, contributing to overall results. However, RH’s fiscal third-quarter results are likely to be affected by an industry-wide soft demand for home furnishings. While RH primarily caters to affluent households, it has been encountering challenges due to a softening luxury housing market, affecting its demand dynamics. Additionally, higher expenses, including international openings and clearance pressure, are expected to have weighed on results.From the margin perspective, RH has struggled with elevated clearance inventory. Clearance sales, while necessary to clear discontinued products, indicate that RH is still adjusting to the post-pandemic normalization of demand. As a result, margins remain pressured despite the company’s attempts to stabilize them. The company expects adjusted operating margin to be in the range of 15%-16% and adjusted EBITDA margin of 21% to 22%. In the year-ago period, the company’s adjusted operating margin was 7.3% and adjusted EBITDA margin was 12.4%. The operating margin is under pressure due to rising selling, general and administrative (SG&A) expenses, driven by marketing costs like sourcebook mailings and other promotional activities.RH Stock’s Price Performance & ValuationRH’s stock has exhibited an upward movement in the past three-month period and has outperformed Hoya Capital Housing ETF HOMZ — which has 20% exposure in the home improvement and furnishings segment — as well as companies like ARHS (down 2% in the past three months), Ethan Allen Interiors Inc. (ETD, up 2.7%) and WSM (up 44.9%).3-Month Price Performance of RHImage Source: Zacks Investment ResearchTechnical indicators are in support of RH’s performance. The stock is currently trading higher than its 50-day and 200-day moving averages. This technical strength reflects a bullish market perception of RH’s prospects. Image Source: Zacks Investment Research Let's assess the value RH offers to investors at its current levels.RH is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 33, which is above its five-year median of 21.45. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about RH's future earnings.How Should Investors Play RH Stock?RH’s performance remains highly sensitive to macroeconomic factors like rising interest rates, consumer confidence, and luxury consumer spending. Any further tightening in the credit environment or slowdown in high-income consumer spending could add downside risk to RH’s outlook.Although the series of rate cuts by the Federal Reserve may bring ease for the homebuilding market and lift the performance of RH stock ahead, execution risks, and ongoing inventory issues could limit growth and margin expansion, leaving RH in a cautious position in the near term.  These headwinds are echoing well through a downward estimate revision trend.Nonetheless, RH's growth strategy is driven by its aggressive long-term investments in product innovation, global expansion, experiential retail, and technology. These efforts, coupled with its ability to navigate a challenging housing market, set the brand apart and support steady demand growth. As broader economic conditions improve, RH is well-positioned to capture significant market share, solidifying its status as a leader in the global luxury home furnishings sector. We recommend current stakeholders to maintain their position in this stock.Free Today: Profiting from The Future’s Brightest Energy SourceThe demand for electricity is growing exponentially. At the same time, we’re working to reduce our dependence on fossil fuels like oil and natural gas. Nuclear energy is an ideal replacement.Leaders from the US and 21 other countries recently committed to TRIPLING the world’s nuclear energy capacities. This aggressive transition could mean tremendous profits for nuclear-related stocks – and investors who get in on the action early enough.Our urgent report, Atomic Opportunity: Nuclear Energy's Comeback, explores the key players and technologies driving this opportunity, including 3 standout stocks poised to benefit the most.Download Atomic Opportunity: Nuclear Energy's Comeback free today.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Williams-Sonoma, Inc. (WSM): Free Stock Analysis Report RH (RH): Free Stock Analysis Report Hoya Capital Housing ETF (HOMZ): ETF Research Reports Ethan Allen Interiors Inc. (ETD): Free Stock Analysis Report Arhaus, Inc. (ARHS): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks