Are RH's Worst Days Behind It?

No-moat

The firm’s outlook for the second half incorporates adjusted gross margin performance well above the 34% average we have implied in our model, at between 36%-37%, which would add about $1 to our $48 fair value estimate, if we assume next year’s (2018) gross margin remains flat over the revised outlook. However, adjusted SG&A expenses are also forecast to come in a bit higher (50 basis points) than we had previously modeled over the second half, at around 28% which could offset some intrinsic value upside. Updated sales guidance ($2.42 billion-$2.46 billion) was largely in line with our prior fiscal year estimates, for $2.42 billion, however the adjusted net income outlook of $70 million-$77 million was well ahead of our $60 million forecast, given the higher gross margin performance anticipated ahead. Previously, our gross margin forecast normalized above 35%, but could nudge up slightly with this update. This could be offset by higher SG&A spend.

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