If the economic cycle is near its peak, investors shouldn't be faulted for being lukewarm on luxury retailers including RH RH — but a bullish case for the stock remains, according to Wells Fargo.
The Analyst
Analyst Zachary Fadem reinstated coverage of RH with an Outperform rating and $145 price target.
The Thesis
Investors should be buyers of RH's stock for two key reasons, Fadem said in a Tuesday note. (See his track record here.)
They are:
◘ The Street's estimates for the upscale home furnishings retailer are too low, the analyst said.
Wells Fargo's 2018 EPS estimate of $7.72 and 2019 EPS estimate of $8.85 are 1- percent and 6-percent above consensus estimates, respectively.
The Street may not fully appreciate the company's earnings outlook as RH continues to move toward its goal of EBIT margins in the low-to-mid teens, the analyst said, adding that EBIT margins should expand 442 basis points in 2018 to 11.4 percent and expand another 109 basis points in 2019 to 12.5 percent.
◘ RH's valuation doesn't factor in the company's long-term growth outlook, Fadem said. RH is trading at 13.9 times the next-12-months P/E — notably below its pre-2016 levels of around 30 times, he said. The stock is trading at a discount of more than 50 percent on a NTM P/E multiple versus high-growth retailers.
The Street may be missing the long-term picture, which includes expectations for a 30-40-percent sales lift per market from its new gallery formats, which implies a $450-million opportunity from bigger ticket sales, according to Wells Fargo.
The company also faces a $260-million opportunity in new markets in 2019 and 2020, along with the potential for another $225 million of hospitality revenue, Fadem said.
Over the much longer term, the retailer's international expansion represents a total opportunity of $3 billion to $5 billion, the analyst said.
Price Action
RH shares were down 3.23 percent at $110.88 at the time of publication Tuesday.
Related Links:
Wedbush: Unlike Many Retail Peers, RH Is 'Thriving'
RH's Retail Strategy, Recent Pullback Turn Stifel Bullish
Public domain photo via Wikimedia.
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