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RH Hikes Its Return Outlook by 10 Percentage Points

By Demitri Kalogeropoulos – Sep 10, 2021 at 12:22PM

Key Points

  • Sales are booming and margins are expanding.
  • RH's management team believes a big part of this uptick is sustainable beyond the current high-growth environment.
  • Management also warned that inventory might be a challenge in the second half of 2021.

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The luxury home furnishings market is booming and RH management thinks it can take advantage.

RH (RH -0.12%) isn't done shocking Wall Street with its operating successes just yet.

The luxury home furnishings giant on Wednesday released second-quarter earnings results that blew past the elevated forecast the company (formerly known as Restoration Hardware) had issued just three months ago. Its growth success powered some head-turning hikes to its fiscal year outlook, too, including in its core return on invested capital metric.

Let's take a closer look.

A couple shopping for furniture at a showroom.

Image source: Getty Images.

There's sales growth in the luxury sector

Sales in the quarter jumped 39% year over year to $989 million. While that boost marked a slowdown compared to the prior quarter's 78% spike, the deceleration was entirely due to COVID-19 related demand swings a year ago. The Q2 demand spike beat the top end of management's early June guidance, too, which predicted revenue growth between 35% and 37%.

RH management credited a robust selling environment for much of the success, but also noted that its focus on the premium niche in its industry was a determining factor. "RH continues to set a new standard for financial performance in the home furnishings industry," CEO Gary Friedman said in a press release, "and our results now reflect those of the luxury sector."

RH earnings are booming but supply lines are tightening

RH faced a much lower tax burden in this period than it did a year ago, but earnings were still strong after accounting for that temporary tailwind. Adjusted operating income jumped 70% to reach 26.6% of sales. Management three months ago had forecast a margin between 25.9% and 26.1%.

Soaring past that figure implies several positive things about the business, including that it is managing through supply chain disruptions and continuing to stock its stores with on-trend merchandise. RH's inventory was up just 12% from a year ago, but executives say they've secured enough products for the third quarter and are starting to build up supplies for the crucial holiday quarter ahead. Still, its manufacturing network is working at full capacity and struggling in some cases to fulfill backorders.

RH boosts its outlook for the full year

Sales growth is accelerating on a two-year basis as compared to last quarter, which means the slightly cautious outlook executives issued last quarter seems too conservative.

Instead, RH now believes sales will rise by between 31% and 33% in 2021, up from the prior forecast ranging from 25% to 30%. Adjusted operating margin could land as high as a blistering 25.5% of sales compared to the 24.3% top forecast from June. And the company's return on invested capital, a key measure of efficiency, is on track to shoot to 70% rather than the 60% that Friedman and his team predicted in the prior outlook.

Executives argued that these latest metrics are being powered by a fundamental upgrade in consumer spending trends around the home, especially in the luxury segment. Investors won't know if that's true until the latest cyclical industry upturn ends.

But there's no denying that RH is taking a big step toward its long-term goals of achieving over $5 billion in annual sales in the U.S. market. And it is highly likely to reach over 20% operating margin overall, which is a rare sight to see in the home furnishings market. Those wins should support continued positive returns for shareholders of this growth stock.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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