RH Surges 35% After Q1 Earnings: Here's What Wall Street Thinks

Shares of RH RH were higher by more than 35 percent and hit a new all-time high of $164.28 Tuesday morning in reaction to a mixed first-quarter earnings report, but encouraging guidance. Here is a summary of what some of the Street's top analysts are saying after the print.

The Analysts

• Baird Equity Research's Peter Benedict maintains a Neutral rating on RH with a price target lifted from $95 to $135.
• The Buckingham Research Group's Kelly Crago maintains a Buy rating on RHwith a price target lifted from $135 to $200.
• William Blair's Daniel Hofkin maintains an Outperform rating on RH.
• KeyBanc Capital Markets' Bradley Thomas maintains a Sector Weight rating on RH with no assigned price target.

Baird: Valuation Full

RH's earnings was highlighted by EBIT upside of 21 percent versus expectations, 31 percent earnings per share beat versus expectations, gross margin expansion of 750 basis points due to a new operating platform, increase to 2018 EPS guidance and increase to 2018 EBIT margin outlook.

RH's performance made it clear initiatives around membership and operations resulted in a "more efficient, stable, and profitable business," the analyst wrote in a note. However, the stock's performance in Monday's after-hours session pushed the stock's valuation to 22x EPS and 12x on EBITDA estimates, which "looks full."

Buckingham: 'Blow-Out' Quarter

Investors should be buyers of the RH's stock after a "blowout" quarter despite a strong move higher, Crago said in a note. The rationale behind a bullish stance is based on the strength of margins, which emphasizes the benefits of management's strategic re-platforming and move away from promotions to boost sales.

RH's report should eliminate any investor concerns related to the company's ability to deliver sustainable comp growth as evident by management's 8 to 10 percent guided comps, the analyst wrote. The company's path towards a mid-teens operating margin is "more clear than ever" which justifies the stock's move to the "top of our conviction list" ahead of significant EPS and multiple expansion.

Related Link: 8 Biggest Price Target Changes For Tuesday

William Blair: Key Points From Conference Call

RH's conference call included three notable takeaways, Hofkin said in a note.

1. Management said it was happy with the performance of new galleries and should see a solid increase in direct revenues of 30 to 50 percent in markets where a new large gallery replaces a smaller legacy gallery.
2. Management reiterated expectations of a low- to mid-teens adjusted operating margin by fiscal 2021 and highlighted the brand's long-term international potential as it continues to look for a first site in London and possibly Paris.
3. RH ended the quarter with a debt-to-EBITDA ratio of 3.9x, which is down from 4.5x at the start of 2017 and down notably from 6.9x at the middle of 2017. Management said it can improve its net-debt-to-EBITDA close to 2.0x by the end of 2018.

KeyBanc: Trading At A Premium

RH remains "one of the more compelling growth stories" under Thomas' coverage after a recovery from a "difficult" performance in 2016, the analyst wrote in a note. Management introduced multiple initiatives that generated results in 2018 and the company should continue reporting impressive earnings reports in the quarters ahead.

However, RH's stock is trading at 18.1x on 2018 estimated EPS and 15.9x on 2019 estimated EPS, which is already a multiple to comparable furniture peers whose stocks trade on average at 16.4x and 15.4x, respectively.