3 numbers spell more backwards for HR stock
HR (NYSE: RH), formerly known as Restoration Hardware, recently reported exceptional first quarter financial results that have boosted its shares by more than 10% at the time of writing.
While the stock has already climbed 340% in the past three years, three important figures from the earnings report explain why investors are excited about HR’s performance and why the stock could post even more gains.
1. A high operating margin for a furniture store
HR revenue in the fiscal first quarter (three months ended May 1, 2021) was quite impressive, increasing 78% year-over-year to $ 860.8 million. But the performance of the company’s margin was the real star.
The operating margin jumped 14.5 percentage points to 21.8%. Higher margins pushed adjusted earnings per share from $ 1.27 in the first quarter of 2020 to $ 4.89 in the most recent quarter.
The HR business model was designed to generate high margins. For example, the company is not sensitive to the usual risks to other retailers that can put pressure on bottom lines, such as seasonal inventory. Plus, HR serves customers who have cash to spend so they don’t rely on handing over inventory during a slow economy to drive sales.
In the quarterly letter to shareholders, CEO Gary Friedman suggested that these margin levels are sustainable: “You also need to be assured that we have pressure-tested our assumptions and business risks and are confident in our ability to maintain a healthy margin. ‘adjusted operating greater than twenty percent in just about any negative economic scenario we can envision. ”
2.25% or more revenue growth
Based on current market trends, management expects growth to be even better than expected. The forecast now calls for an increase in revenues of 25-30% compared to last fiscal year. Previously, the expected growth range for the company was 15-20%.
RH is taking advantage of pent-up demand for home renovations and the reopening of the economy. It just opened RH Dallas in May and the rooftop restaurant is already booked through August.
3. CEO sees $ 20 billion market opportunity
The company is not just dependent on a strong housing market, it is looking to gain market share in luxury furnishings. Friedman said, “We plan to launch an unimaginable amount of innovative new strategies designed to elevate and further expand the HR brand. ”
It offers many exclusive premium collections in several categories, such as RH Interiors, RH Beach House, RH Baby & Child, RH Linens, and many more. This large portfolio is one of the reasons it can generate strong income and margins.
RH also differentiates itself with its lavishly designed stores, or what he calls galleries. He plans to open one in Paris in the fall of 2022 on the Champs-Elysées. Friedman said the new gallery will feature a “decayed granite path lined with majestic hedges that leads to a garden courtyard where you will encounter 18-foot brass doors that open to a six-story atrium connected by spiral staircases. brass and a glass elevator “. Investors should not overlook his vision and his passion.
RH has secured five locations in London, Munich and Dusseldorf, Germany, and will soon secure leases for five more that will open over the next three years.
Based on the current strategy, management estimates that annual revenue can reach between $ 20 billion and $ 25 billion in the long run, or about seven times its current size.
A listed share for more potential
Over the past decade, RH has resisted the trend of the retail industry by moving away from e-commerce and doubling the reliance on bricks and mortar. The company clearly has a winning formula in creating otherworldly shopping experiences, and the latest quarterly results are another reminder that Friedman’s vision is coming true.
In addition, this retail stock is not expensive compared to the company’s outlook. Stocks are currently selling for 30 times forward earnings estimates, but with EPS expected to grow faster than earnings due to rising margins, HR stock still seems like a good investment.
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