Shares of RH (NYSE: RH) are down about 50% this year amid a market-wide selloff. Still, some experts see it well positioned to sustain strong revenue growth.
Positive Outlook for Luxury Sector
Luxury goods sales are on track to grow at least 5% in 2022 as consumers in the U.S. and Europe continue to purchase luxury watches, jewelry, and footwear in the face of record-high inflation and geopolitical tensions.
“Consumption doesn’t seem to be affected so far,” said Claudia D’Arpizio, a partner at the consultancy firm Bain.
The firm expects sales of luxury products to be in the range of 305 billion euros ($320 billion) to 330 billion euros this year as the sector continues to gain momentum following the easing of coronavirus-induced restrictions. The new estimates come as a more optimistic update from the previous forecast range of 300 billion to 310 billion euros.
D’Arpizio said Bain broadened its forecast range to account for a rise in luxury goods sales in spite of the battered U.S. stock market this year and fears over a potential global recession.
“We are aware that we are in a very turbulent environment,” she said.
According to the Boston-based consultancy, personal luxury goods sales hit 288 billion euros in 2021, topping the previous estimates of 283 billion euros driven by increased demand during the holiday period.
Despite the 40-year-high inflation and coronavirus lockdowns in some cities in China, luxury goods companies successfully lured customers and increased the demand in Europe and the U.S. through effective marketing.
D’Arpizio said the firm was “astonished” by buyers’ steady confidence despite a sharp surge in prices.
The firm is also confident that local spending from Chinese buyers will rebound through the remainder of the year and pointed out South Korea as another booming market.
In one of its earlier reports, the firm reported that the U.S. surpassed Europe as the world’s largest luxury goods market.
How Did RH Perform Recently?
Luxury home-furnishings company RH recently reported earnings results for Q1 2022, smashing the consensus estimates.
The company reported first-quarter adjusted earnings per share (EPS) of $7.78, up from $4.89 in the year-ago period and well above the analysts’ consensus of $5.36 per share. Net revenue came in at $957 million, up 11% year-over-year and compared to the consensus projection of $925.3 million.
Adjusted gross margin stood at 52.1%, up from 47.3% in the same period last year and above the estimated 48.2%. The adjusted operating margin for the quarter was 24.7%, up from 22.6% year-over-year.
For the current quarter, RH expects the adjusted operating margin to be in the range of 23% to 23.5%. It also expects net revenue to be down between -1% and -3% in the second quarter.
As for the full fiscal 2023, the company expects revenue growth to range between 0% to 2%, and adjusted operating margin in the range of 23% to 24%, down from the previous forecast of 25% to 26%.
RH noted a slowdown in demand trends that emerged after Russia’s invasion of Ukraine, which have exacerbated “during the market disruption over the past several months.” Therefore, the company updated its guidance based on “current trends and the uncertain macro-economic environment.”
What are Analysts Saying?
Earlier this month, analysts at Goldman Sachs lowered their price target on RH from $466 to $308 per share, rating the stock as Neutral.
Barclays analysts also trimmed their price objective on the company’s shares from $528 to $400, setting the rating at Overweight. Wells Fargo also slashed RH’s price target to $400 per share from $500. This implies an upside potential of roughly 60%.
Although the RH stock remains down more than 53% since the start of 2022, analysts see it well positioned to pass on higher input costs to high-end consumers and therefore sustain robust revenue growth.
Summary
Shares of RH are trading sharply lower this year amid Fed tightening and inflation. Still, the stock could outperform in the second half of the year if the market sentiment improves.
