It has been about a month since the last earnings report for Restoration Hardware (RH). Shares have lost about 2.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Restoration Hardware due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

RH Q2 Earnings & Revenues Beat Estimates, Margins Rise Y/Y

RH reported stellar second-quarter fiscal 2020 (ended Aug 1, 2020) results on the back of strong demand and solid margins. Both adjusted earnings and revenues handily beat the Zacks Consensus Estimate, as well as grew on a year-over-year basis.

RH witnessed a 16% increase in demand for the fiscal second quarter. For August, the same was up 47% year over year. It further increased to 44% in the beginning of September.

Earnings, Revenue & Margin Discussion

Adjusted earnings of $4.90 per share impressively surpassed the consensus mark of $3.44 by 42.4% and increased a whopping 53.1% from the year-ago level.

Net revenues of $709.3 million grew 0.4% year over year. Adjusting for recall accrual, net revenues increased 0.5% from the prior year to $709.7 million. The figure surpassed the consensus mark of $695 million by 2.1%.

Adjusted gross margin expanded 550 basis points (bps) to 47.5% for the quarter. Adjusted SG&A contracted 140 bps owing to lower advertising and compensation costs, partially offset by an approximate 40 bps drag from incremental COVID-related expenses.

Adjusted operating margin increased a notable 690 bps year over year to a record 21.8%. Adjusted EBITDA also surged 38.9% year over year to $185.8 million for the quarter.

Store Update & Balance Sheet

As of Aug 1, RH operated 68 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 15 Waterworks showrooms throughout the United States and U.K., and had sourcing operations in Shanghai as well as Hong Kong.

RH’s cash and cash equivalents were $17.4 million as of Aug 1, 2020 compared with $47.7 million on Feb 1, 2020. The company ended the quarter with merchandise inventories worth $487.6 million compared with $438.7 million as of Feb 1, 2020. Total net debt to trailing 12 months adjusted EBITDA was 1.3 as of Aug 1, 2020.

Net cash provided by operating activities was $128.3 million for the first six months of fiscal 2020 compared with $97.1 million in the comparable year-ago period. Free cash flow totaled $217.6 million at fiscal second quarter-end, up from $109.2 million on Aug 3, 2019.

Fiscal 2020 View

Given uncertainties in the overall market, RH did not provide any guidance for fiscal 2020. With strong demand trends and limited supply, it has redirected resources to focus on persistent elevation and increase its offerings, expansion in Europe, along with the development of its digital portal — the World of RH. Also, it plans to open the first RH Guesthouse in New York in late spring.

Owing to disruption across the global supply chain, it expects revenue improvement to lag demand growth by approximately 5-10 points in the fiscal third quarter. It expects a positive impact on revenues for the fiscal fourth quarter as manufacturing recovers and inventory receipts catch up to demand. Meanwhile, RH expects adjusted operating margins to expand approximately 20% in fiscal 2020, with revenue growth in mid-single digits.

Long-Term Targets

The company expects to generate net revenues growth of 8-12%, adjusted operating margins in low to mid twenties, adjusted net income improvement of 15-20% and ROIC to be more than 50% in the long run.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 61.38% due to these changes.

VGM Scores

Currently, Restoration Hardware has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Restoration Hardware has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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