RH (RH 0.64%) had more good news for investors this week. The luxury furnishings specialist reported operating results for the period that ended in late October, and that announcement featured solid sales growth, expanding profitability, and another upgrade to the fiscal-year outlook.
Let's dive right in and see if there was anything that might have been missed in the initial reports.
Image source: Getty Images.
Accelerating sales trends
Investors were worried about slowing growth as consumer spending shifted away from the home furnishing category, which had expanded quickly over the past 18 months. Another big concern heading into this report was that RH, formerly known as Restoration Hardware, might have had trouble securing the right inventory due to supply chain bottlenecks.
The company erased those concerns on Wednesday. Sales jumped 19% year over year to $1 billion, translating into a 49% increase compared to the same period in 2019. That two-year expansion pace marked an acceleration over the 40% increase the company reported in the previous quarter.
It also surpassed management's short-term targets. "Our performance demonstrates both the desirability of our exclusive products," CEO Gary Friedman said in a shareholder letter, "and our ability to overcome ... supply chain challenges."
Expanding margins
The news was just as good around profits, where earnings surged thanks to rising margins. RH booked a 1.8 percentage point boost to its gross margin, pushing that metric above 50% of sales. Operating margin continued its impressive climb to reach 27% of sales, well higher than that of most peers in the furniture industry.
RH Operating Margin (TTM) data by YCharts
"Our results now reflect those of the luxury sector," Friedman explained. Rising prices helped, and so did strong demand for RH's exclusive product releases. The company's adjusted earnings rose 13% to $7.03 per share compared to $6.20 per share a year ago.
Looking out to 2022
While forecasting the fourth quarter, management cited several potential challenges to the holiday season outlook, including supply chain issues that forced RH to delay several gallery and product launches. The spreading of a new COVID-19 variant adds uncertainty to the growth story as well.
But RH still saw reason to issue its third consecutive boost to its fiscal 2021 outlook. Sales are now predicted to rise by 32% to 33%, year over year, rather than the 31% to 33% increase management had forecast three months ago. Profitability metrics received a similar boost, and adjusted margin is now on pace to reach as high as 26% of sales.
RH is busy preparing for a packed period of product and gallery launches in 2022, in part thanks to delays that impacted the second half of 2021. Thus, while management hasn't issued a detailed outlook for the upcoming fiscal year, it's likely the company will set more sales records if selling conditions don't deteriorate.
In fact, rather than showing any evidence of a slowdown, RH's trends through late October confirm that demand is rising in its luxury niches. Combined with its proven track record for navigating supply chain challenges, that boost implies a long runway for sales gains ahead. And, as operating margin soars toward 30% of sales, investors are likely to see solid returns from holding this growth stock.
