Restoration Hardware Holdings, Inc. (NYSE:RH) is soaring on its earnings report. RH 4Q EPS was inline with Feb. 24th pre., but initial FY16 (& 1Q) guide was below Street est. for both sales & EPS due to RH Modern product delays, slowing demand from high-end & 2H weighted product newness/store openings. Maintain Market Perform & Lower EPS/PT to $44 (was $47) on ~15x FY17E EPS, opines Cowen.
Restoration Hardware Holdings analysts react
Most likely, neither the skeptics nor the supporters will walk away from Restoration Hardware Holding’s 4Q completely satisfied. The naysayers can point to the lingering turbulence RH is seeing in the oil markets (that will cost it 5pts of growth in 1Q) & the fact that its overall sales haven’t fully recovered from the market’s gyrations earlier in the year. The believers can say that RH is addressing some of its execution misses & its real estate and product transformation remains on track. We argue that the debate is tilted to the constructive case given the LT potential that exists & a valuation that hovers around 11x a realistic CY’17 EPS est. of $3.35. Thus, we are keeping the faith and reiterating our Buy rating.
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Given the number of questions heading into the print, we believe RH performed best on the most difficult task – guidance. We had believed that RH was in a goldilocks scenario, where on the one hand if guidance was too
aggressive this would be met with skepticism, allowing bears to press on the assumption that RH could miss, while guidance that was deemed too weak would have further fueled the fire that problems persist. Instead, we believe Restoration Hardware Holdings delicately balanced the line between sales and EPS guidance, providing a plausibly low bar while at the same time allaying concerns that RH is and would comp negative. We maintain our Buy rating on valuation.
Restoration Hardware Holding enters 2016 facing significant uncertainty. It is in the midst of remedying supply chain challenges for its modern business, problems that have driven cancellations and significant remedial costs; it is confronting a challenged high-end consumer, particularly in Texas, Florida, and parts of Canada; and, it has jettisoned its traditional promotional cadence in favor of a creative but untested membership discount program.
The outlook of flat to slightly down earnings in 2016 is a stark contrast to the 38% and 15% EPS growth over the last two years. While the long-term story of RH’s real estate transformation strategy remains intact, we believe the near-term visibility into topline and margins is blurry at best. The introduction of the Grey card, the shift in the timing of the mailing of the RH source books, the delay in Gallery openings, supply issues with RH Modern, and headwinds from energy markets have obscured the visibility even further. As a result, we have reduced our EPS forecast further to $0.06 in Q1 (driven by a 300bps decline in operating margins – 2/3 GM and 1/3 SG&A) and $2.72 in 2016. At 14x our $3 EPS for 2017e, our base case goes to $42 and the risk/reward is balanced, in our view.
Restoration Hardware Holdings reported 4Q15 EPS of $0.98, as expected following the February 24 pre-announcement. We are lowering our 2016 EPS to $2.70, essentially flat with the 2015 result. This expectation balances dynamics such as indications of the underlying strength of the company’s strategy, with remaining unknowns, such as the consumer’s response to the Grey Card. We continue to believe the company can return to its growth algorithm once a number of temporary impacts subside including production delays (and the related significant investments in customer experience), as well as the transition from frequent discount emails to the Grey Card promotional strategy. We are lowering our target price to $75 in light of this near-term pressure.