RH Sinks as Street Sees No Letup From SALT Effect on Housing

(Bloomberg) -- RH plunged the most since June 2017 after the upscale home furnishings retailer disappointed investors with weaker-than-expected sales in the fourth quarter and a cut to its year view.

The main culprit for the shortfall was a weak macro environment, including a softening high-end housing market, RH’s high exposure to state and local taxes and stock market volatility. Analysts expect this uncertainty to linger -- even for RH’s core, upscale clientele. The company, previously known as Restoration Hardware, also faces pressure from weak membership growth and a lack of material improvement in sales productivity from gallery conversions, some analysts said.

The shares sank as much as 17 percent to $109.30 in early trading Friday, the lowest intraday since Dec. 26. The stock had gained 10 percent so far this year through Thursday’s close.

Deutsche Bank, Mike Baker

• Sales and profit trends have become increasingly difficult to predict for RH in the current environment; downgrades to hold from buy, price target to $124 from $185
• “While we continue to believe in the long-term prospects for RH and acknowledge that it is one of the few retailers growing sales, margins, profit dollars and earnings, we think the market volatility means now is not the time to continue to own the stock”
• RH’s high-end, highly discretionary product falls victim to signs of a slowing economy, stock market gyrations and weakness in high-end housing trends

Wells Fargo, Zachary Fadem

• RH’s forecast cut (-6%/-14% sales/EPS versus prior guidance) “appears worse than the reality”
• Figures the core sales/EPS reductions are closer to 1%/6% versus prior consensus after considering the self-inflected business exits, lease accounting and higher tax rate
• Also, RH’s cost flexibility bodes well for this year, and combined with a first-quarter market rebound and lower interest rates, provides “some comfort that today’s newly lower bar is achievable”
• The stock drop is an “overreaction that we believe should be bought”; rates outperform, price target cut to $160 from $175

Loop Capital, Anthony Chukumba

• “RH is appropriately ‘playing the long game’ in focusing more on continuing to cultivate a luxury brand as opposed to ramping up promotions in order to drive near-term top-line growth”
• This was RH’s second negative earning surprise in the past three quarters, which likely harms investor confidence and constrain valuation
• Keeps buy rating but cuts price target to $140 from $200

What Bloomberg Intelligence Says

RH’s differentiated strategy and high-end focus offer little protection from a slowing economy, forcing the retailer to cut its full-year 2019 sales outlook by 6% at the midpoint as trends remained slow into 1Q. This could be the first of many guidance cuts, in our view, amid softer consumer spending that was reflected in fourth-quarter GDP growth of just 2.2%.
-- Seema Shah, retail analyst
-- Click here for the research

Telsey Advisory, Cristina Fernandez

• While RH continues to generate an industry-leading double-digit operating margin, the sales shortfall highlight the “volatility inherent in the business and its high correlation to macro factors such as the stock market and the health of the high-end housing market”
• Its core affluent customer is also hurt by changes in state and local tax deductions in high income/property tax states like California and New York — “with the effect likely still to come in the next few months”
• Rates market perform, price target to $125 from $150

UBS, Michael Lasser

• Continued sluggish sales trends in the first quarter, despite recent stock market stability, likely indicate that the high-end housing market has remained weak; plus RH may be seeing a drag from lower tax refunds for its core customers
• These factors could persist “for a while”
• In addition, RH is not getting much of a lift from adding new members as its membership base grew just 3% year-over-year last year
• “It’s hard to have strong conviction in its revised outlook for next year” given these uncertainties; rates neutral, price target to $126 from $140

BofAML, Curtis Nagle

• Sees more downside to estimates despite the surprising “big guide down”
• Part of the reduced outlook reflects higher macro uncertainty states and stock market volatility), ”which we believe will continue through at least this year”
• Beyond macro risks, core sales productivity doesn’t seem to be materially improving from RH’s gallery conversions, “a key piece of the growth story for RH”
• Expects home furnishings trends to remain soft and also sees risk from RH’s plan to launch two “highly discretionary product lines" (RH Ski House and Beach House) later this year in a softening demand environment
• Rates underperform as “risks are not just in the macro,” price target to $85 from $90

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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