RH RH shares tanked 5.06% in the after-hours trading session on Jun 29 after it provided a guidance update for fiscal 2022 owing to the softening demand trends.
Based on the macro-economic conditions and our current business trends, RH expects net revenue to decline between 2% and 5% for fiscal 2022 versus 0-2% growth expected earlier. This indicates a decline from 32% growth reported in fiscal 2021. Adjusted operating margin is now anticipated in the range of 21-22% compared with 23-24% of earlier projection. In the year-ago period, the metric was 25.6%.
RH expects fiscal second-quarter net revenues to fall 1-3%. The adjusted operating margin is projected to grow in the 23-23.5% range. In the year-ago period, it generated net revenue growth of 39% and an adjusted operating margin of 26.6%. The quarterly outlook remains unchanged mainly owing to faster backlog relief offsetting lower-than-expected demand.
Chairman and chief executive officer of RH, Gary Friedman, stated, "With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year."
Management also noted that the deteriorating macro-economic environment will pose a short-term challenge and expects to see extraordinary growth backed by the COVID-driven spending shift and shed less valuable market share. Also, RH believes that its long-term investments will enable the company to drive industry-leading performance over a longer-term horizon.
This Zacks Rank #3 (Hold) company has not repurchased any shares since the announcement of the expansion of its common stock repurchase authorization on Jun 2, 2022.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Softening Housing Demand to Ail Retail Home Furnishing Business
In the past several quarters, the overall construction and related industries have grappled with supply chain issues, higher material, labor and transportation costs and project delays. Since the beginning of 2022, increasing mortgage rate hikes and the Federal Reserve’s forecast for multiple rate hikes and extremely high home prices have recently resulted in softening demand trends.
The recent housing statistics reflect an accurate picture of the industry and are also moderating. For May, existing-home sales, building permits and housing starts declined month-over-month. Pending home sales inched up 0.7% after declining for the trailing six quarters.
Builder confidence for newly-built single-family homes also declined for the trailing six quarters and posted a 67 reading in June (lowest in two years), per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).
The home furnishing space is directly related to the housing industry. Any shift in consumer spending patterns from home and home-related categories may directly affect the RH and other home furnishing players like Williams-Sonoma, Inc. WSM, Ethan Allen Interiors Inc. ETD and The Lovesac Company LOVE. May retail sales data for furniture & home furnishings space, published by the Census government, declined almost 1% from the April reading.
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So far this year, RH has underperformed the Zacks Retail - Home Furnishings industry.
A Brief About Above-Mentioned Stocks
Williams-Sonoma: This is a San Francisco, CA-based multi-channel specialty retailer. The company has been benefiting from a solid housing market, focus on digital initiatives, higher e-commerce penetration and product introductions. In addition to continued enhancement of the e-commerce channel, supply chain optimization and disciplined cost control are expected to drive growth.
Williams-Sonoma, a Zacks Rank #3 company, has declined 31.4% this year. Earnings of WSM are expected to grow 9.7% for fiscal 2022.
Ethan Allen Interiors Inc.: This Danbury, CT-based company operates as an interior design company, manufacturer and retailer of home furnishings. Its wide array of offerings, a strong network of retail design centers and focus on interior design services and technology enhancement have benefited the company.
Earnings of Ethan Allen, a Zacks Rank #3 company, are expected to grow 47.3% for fiscal 2022. It has slipped 22.3% this year.
Lovesac: This Stamford, CT-based company retails home furnishing products like alternative furniture stores, sectionals, bean bags, bean bag chairs and other accessories. LOVE has been experiencing profitable growth across all sales channels given operational flexibility, highly-engaged customers, innovation and a proven omni-channel approach. For fiscal 2022, showroom sales grew 104.6% and and “Other” channel registered growth of 106.7%. Its recently launched Mobile Concierge service and unique business model with a concentrated SKU count and manufacturing spread across multiple geographies bode well.
LOVE currently has a Zacks Rank #3 and has an expected earnings growth rate of 64.7% for fiscal 2023. Its shares have declined 53.8% this year.
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