Buffett-Backed RH Seen Posting 20% Growth With Stock Near Record

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RH, the Warren Buffett-backed luxury home furnishing company formerly known as Restoration Hardware, has a lot to live up to with its quarterly earnings report.

The stock has surged more than 500% in the past year as consumers shut in by the coronavirus pandemic turned their attention to spending on their homes. Wall Street analysts expect to see a 20% increase in sales when the company reports fiscal fourth-quarter results after the close of trading on Wednesday.

Investors will also be watching for any guidance the company could provide. In a December earnings conference call with analysts, RH executives said they expect revenue to increase by double-digits and operating margins to expand in the year ending January 2022. Buffett’s Berkshire Hathaway Inc. currently owns about 8.5% of the company after recently increasing its stake, according to a February regulatory filing.

“Demand for home furnishings has been strong, driven by the ‘nesting’ trend related to Covid-19 and elevated home sales activity, particularly in the suburbs,” Telsey Advisory Group analyst Cristina Fernandez wrote in a note last week. She predicts quarterly sales to climb 23% to $818 million, which is among the highest revenue targets for sell-side analysts, according to data compiled by Bloomberg. She rates the stock outperform.

Her bullishness on sales growth is further supported by recent results from multiple home-furnishing peers including Williams-Sonoma Inc., which reported an approximate 26% jump in year-over-year comparable sales for its fourth quarter. In addition, Wayfair Inc. said last month quarterly revenue in the U.S. rose 40%.

Buffett-Backed RH Seen Posting 20% Growth With Stock Near Record

The rally in RH has left analysts scrambling to catch up. Their average price target as of Tuesday’s close was about 2.5% below where the shares were trading. Eleven of them have buy recommendations on the stock, while six rate it buy and two say sell, according to data compiled by Bloomberg. The shares peaked at a record high on Monday.

Not all analysts view recent competitor strength as a positive read across for RH. Jefferies’ Jonathan Matuszewski says he’s seen an increasing propensity for RH customers to introduce Williams-Sonoma’s West Elm and Pottery Barn brands, as well as other “accessible luxury” furnishing concepts into their home decor during the pandemic.

“We believe this dynamic has been driven by ongoing price increases at RH as well as mounting out-of-stocks tied to a less-nimble supply chain,” he recently wrote. Matuszewski rates RH underperform.

Another area of focus is earnings-per share performance. Some firms, including Cowen, Gordon Haskett, and Telsey have reduced their fourth-quarter EPS estimates due to a higher expected share count as the increased stock price since the end of the third-quarter elevates dilution from RH’s convertible notes.

Analysts on average expect to see fiscal fourth-quarter adjusted earnings per share of $4.73 on revenue of $797.3 million. Fourth-quarter adjusted gross margin is estimated to be 45.9%, according to data compiled by Bloomberg.

Commentary on management’s full-year outlook will also be in focus Wednesday. Wedbush’s Seth Basham, who rates shares outperform, told clients last week there could be some upside to the initial forecasts given on the last earnings call with favorable drivers such as a draw down of backlog, the restart of sourcebook mailings, new product additions, an improved contract business, and continued strength in both second-home and suburban housing.

RH shares hit a record intraday high of $540.49 on Monday. The stock has climbed 14% so far this year, as of Tuesday’s close.

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