RH breaks out post earnings; Squeeze reminiscent of LOVE move

RH’s Q2 results came in slightly above expectations on both earnings and revenue, with adjusted EPS of $1.69 surpassing the consensus estimate of $1.60, and net revenue reaching $829.7 million, modestly exceeding the forecast of $825.1 million. While these numbers were not dramatically higher than expected, they showcased RH’s ability to deliver in a challenging macro environment. The company also posted an adjusted gross margin of 45.2%, outperforming estimates of 44.5%, indicating improving product margins as a key positive.

A notable driver for RH this quarter was its demand trajectory, particularly in July and August. The company reported a 7% year-over-year increase in Q2 demand comps, slightly below the anticipated 9-10%, but the sequential improvement is worth noting. July saw a 10% uptick in demand, while August accelerated further with a 12% increase. This momentum reflects growing confidence in RH’s positioning, even amid broader macroeconomic uncertainty in the premium furnishings sector.

Despite these positives, RH lowered its full-year guidance, citing slower demand acceleration as a key reason. The company now expects FY revenue growth of 5-7%, down from the previous forecast of 8-10%. Additionally, it guided for a full-year adjusted EBITDA margin between 17-18%, which remains solid but reflects cautious optimism as RH continues to navigate a difficult market environment.

Q3 guidance was also somewhat mixed. RH anticipates Q3 revenue growth in the 7-9% range, with an adjusted operating margin between 15-16%. While these figures suggest some moderation in growth, they also highlight the company's ability to stabilize its operations and margins, driven by product launches and stronger demand from higher-end consumers.

The market responded favorably to RH’s results, with the stock rallying by 22% post-earnings. This was largely due to expectations being better than feared, as many investors had braced for a more significant slowdown. Moreover, the stock's low float of 14 million shares and a high short interest of 13% likely contributed to a short squeeze, driving the stock price through key resistance levels around $293.

Analysts were generally positive about RH’s outlook. Stifel reiterated its “Buy” rating, emphasizing that the demand acceleration and positive product margin inflection differentiate RH in the premium furnishings sector. TD Cowen echoed this sentiment, raising their price target to $350 and highlighting the many catalysts in place for RH’s continued growth, particularly in a recovering housing market.

In conclusion, RH’s Q2 performance, while not without its challenges, showcased resilience and improving demand trends. With key product margins turning positive and expectations now reset, the company appears well-positioned to capitalize on a differentiated growth profile, setting up potential upside in the second half of the year and beyond. Investors remain optimistic, with the recent rally signaling renewed confidence in RH’s ability to navigate the current environment.