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Will Strategic Moves Aid RH Despite Supply Chain Disruption?

RH RH has been banking on strong growth initiatives, the returns-focused plan and expansion strategies. Also, its new business model coupled with solid housing and renovation market backdrop are expected to drive the stock.

Recently, it posted stellar results for fiscal first-quarter 2021, as RH Core demand was solid throughout the quarter. Notably, all key metrics grew significantly on a year-over-year basis and topped analysts’ expectation.

The company’s price performance is reflective of the above-mentioned positives. In the past three months, the stock has gained 46.7% compared with the industry’s 21.3% growth and S&P 500 composite’s 7.6% rally.

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Let’s check out the substantial factors supporting the growth trajectory of this leading luxury home furnishing retailer. Also, we will find out the potential risks for this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

RH’s Strategic Initiatives to Boost Performance

RH has undertaken several steps to build its status as a leading luxury retailer in the home furnishing space. Strength in the multi-channel platform, membership model, elevation of brand and architecture as well as focus on improving profit margins, and creating a new and differentiating shopping experience with the addition of hospitality (restaurants and cafes) in new galleries bode well.

Notably, RH’s management emphasized on a number of strategic initiatives during fiscal first-quarter 2020 earnings call. This will help the company to evolve from a home furnishings retailer to a luxury lifestyle brand over time including: 1) a transformation of the website to "The World of RH", 2) expansion of interior design services to include architecture and landscape architecture; 3) the launch of RH Residences, or furnished homes and condos; 4) launch of RH3, a luxury yacht that customers can rent for travel to the Caribbean and Mediterranean; and 5) international expansion in Europe.

This apart, its focus on outdoor furniture stores and business expansion bodes well. The company is planning to open three new Design Galleries in 2021.

Margin Expansion Plans

RH has been working on various profit expansion plans. From fiscal 2016 through fiscal 2020, it significantly increased operating margins in the business. In fact, in fiscal first-quarter 2021, adjusted gross margin expanded 550 basis points (bps), adjusted operating margin surged a notable 1,260 bps and adjusted EBITDA margin increased 1,050 bps year over year.  

For fiscal 2021, it expects adjusted operating margin within 23.5-24.3%, indicating growth of 170-250 bps from the year-ago figure of 21.8%. For the fiscal second quarter, it expects adjusted operating margin within 25.9-26.1%.

Strong Growth Expectation & Upbeat View

On the back of the above-mentioned positives, solid housing and renovation market momentum and the recent RH demand trends, the company has raised its fiscal 2021 guidance. The company now expects revenues to grow 25-30% versus its prior guided range of 15-20%.

The Zacks Consensus Estimate for fiscal 2021 revenues is pegged at $3.68 billion, indicating 29.2% year-over-year growth. Also, the same for earnings is $22.23 per share, suggesting a 24.7% year-over-year increase. For the fiscal second quarter, the consensus mark for revenues and earnings is $972.26 million and $6.37 per share, implying a rise of 37% and 30% year over year. It is likely to generate earnings growth of 17.5% in three to five years.

Solid VGM Score & ROE

It has an impressive VGM Score of A, supported by a solid Growth and Momentum Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer solid investment choices.

Also, the stock provides solid return on equity. Its ROE stands at 156.9% compared with the industry’s 34.2%.

Supply Chain Disruption & Operational Challenges

Although demand trends have improved significantly after the fiscal first quarter, many of its Restaurants and Galleries continue to restrict occupancy and other operations. Delay in manufacturing, low inventory and supply chain disruptions are near-term headwinds.

Various constraints in the merchandise supply chain have resulted in some delays to convert business demand into revenues during the fiscal first quarter. RH expects that backlog of orders coupled with business conditions related to the pandemic will continue to adversely affect the capacity of its vendors and supply chain to meet demand levels during fiscal 2021. In fact, it may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand.

Also, increased competition within the home furnishings sector has resulted in potential or actual litigation between RH and other industry players like Williams-Sonoma, Inc. WSM, The Home Depot, Inc. HD as well as Lowe's Companies, Inc. LOW related to a variety of activities.

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