RH (RH 1.32%) investors are in for a volatile trading week ahead. The luxury home furnishings retailer will announce its fourth-quarter earnings on March 29, in a report that will show whether its strong demand trends held up through early 2022.
The operating update will answer key questions about profitability as inflation sped up in recent months. But the bigger questions surround management's outlook for the next year, which might include slowing sales gains and surging expenses.
Let's take a look.
The sales trends
RH will likely have good news to report on the growth front. The company beat management's outlook in each of the last three quarters, after all. Sales in the most recent quarter jumped 19% to cross $1 billion, and executives said in early December that the boost reflected "the strongest two-year growth in our industry ."
Most investors are looking for just a modest slowdown this time out as revenue rises 15% to $931 million in Q4, putting total sales for the year up roughly 33%.
Image source: Getty Images.
Management's official forecast didn't incorporate a few unforeseen challenges, though, including the omicron variant, supply chain bottlenecks, and surging inflation. We'll learn this week whether those issues knocked RH off of the impressive growth path that investors have seen over the last two years.
About those margins
One of the biggest factors making RH an attractive stock lately has been its surging profit margins. As a luxury brand in an expanding niche, its position is ideal for pushing profitability higher.
Operating margin set records in the past few quarters, in fact, by pushing above 20% of sales. That's a new high for RH, but it also sets the company apart from most of its peers .
RH Operating Margin (TTM) data by YCharts.
The selling environment became tougher in late 2021 and early 2022, though, according to rivals like Wayfair, who have noticed a shift back away from spending around the home after two consecutive years of booming demand. We'll learn this week whether RH is seeing the same trend and whether the slump has threatened management's hope of pushing adjusted operating margin closer to 30% of sales.
The 2022 outlook
The big question is whether RH can continue expanding in 2022 despite pressures like inflation and slowing industry growth. Heading into the report, most investors are looking for management to project a roughly 10% sales boost this year compared to the 33% spike the company saw in 2021.
Supply chain issues convinced RH to push the launch of several major products into early 2022, which might help the retailer start the fiscal year off with a bang. On the other hand, those delays might have snowballed as inventory became tighter.
All told, its likely that CEO Gary Friedman and his team will project confidence about the long-term growth outlook that calls for sales to dramatically expand over time as the company works to secure a bigger piece of a massive home furnishings market. Its focus on the premium niche has already demonstrated that RH can achieve market-leading profitability, too.
The sales growth and earnings spikes might slow in 2022 after two years of unusually strong gains. But RH appears to be on the right track for boosting market share. That success should ultimately drive positive investor returns through the weaker selling environment ahead.
