Restoration Hardware Holdings, Inc Common Stock (NYSE: RH) Stock Cools Post Hot Rally

Restoration Hardware Holdings, Inc common stock (NYSE: RH) stock rallied 20.05% on 10^th September, 2020 and slightly cooled off in September 11^th, 2020 session, falling over 0.8% on 11^th September, 2020 (As of  10:35 am GMT-4; Source: Google finance).

As of second quarter of FY 20, the company continues to focus on the continued elevation and expansion of the product offer, the company’s entry into Europe, and the development of the World of RH, the digital portal, presenting the products, places, services, and spaces. Further, the company plans to open the first RH Guesthouse in New York in late Spring, virus restrictions permitting. The company’s free cash flow for the second quarter doubled to $218 million from $109 million last year. During the second quarter, the company repaid the balance of the $300 million convertible notes due July 15, 2020 with cash. The firm ended the second quarter with total net debt of $697 million and the ratio of total net debt to trailing twelve months Adjusted EBITDA of 1.3 times. While on hand inventory at the end of the second quarter was down 7%, total inventory including in-transit, was up by 1% versus last year. The company’s current availability under the revolving line of credit is approximately $309 million.

Moreover, the company’s investments to elevate the RH brand led to product margins expansion of 490 basis points in the second quarter, leading to adjusted gross margin expansion of 550 basis points to 47.5% versus 42.0% last year. Adjusted SG&A declined 140 basis points due to lower advertising and compensation costs, which was partially offset by an approximate 40 basis point drag from incremental COVID related expenses. The company has achieved record adjusted operating margin of 21.8% in the second quarter, 690 basis points higher than last year’s previous record of 14.9%

RH in the second quarter of FY 20 has reported the adjusted earnings per share of $4.90, beating the analysts’ estimates for the adjusted earnings per share of $3.44, according to Zacks Investment Research. The company had reported flat adjusted revenue of  $709.7 million in the second quarter of FY 20, beating the analysts’ estimates for revenue of $695 million.

For longer term, the company expects net revenue to grow in the range of 8% to 12%, adjusted operating margins to be in the low to mid twenties, adjusted net income growth to be in the range of 15% to 20% and ROIC in excess of 50%. For fiscal 2020, the company expects 20% adjusted operating margin and mid single digit revenue growth.