KeyBanc: Buy The Dip In RH Shares

Restoration Hardware Holdings, Inc RH shares were sold off for three consecutive sessions following the release of its fiscal second-quarter results last week, with the negative sentiment blamed on a revenue miss.

The Analyst

KeyBanc Capital Markets analyst Bradley Thomas upgraded shares of RH from Sector Weight to Overweight with a $166 price target. 

The Thesis

Investors should look past RH's sales miss, as the weakness came from a position of strength, Thomas said in the upgrade note. (See his track record here.) 

The retailer is leveraging brand power and cutting back on promotions and marketing, the analyst said. 

RH's 5-percent comp in Q2 —  although below the expected 6 percent — was the strongest in Thomas' coverage universe, he said.

The analyst seconded the company's decision to optimize for margins and profits during the quarter, especially as gross margins expanded 800 basis points and EPS of 74 cents beat the consensus.

The company's expectations for 20 percent-plus net income growth for 2019, as margins approach the mid-teens target for 2020, positions it for meaningful EPS upside, Thomas said. 

KeyBanc sees the furniture maker's $5-billion revenue target as achievable, given that the company has about 19 new galleries and the potential for opening 70 more domestically and more overseas.

"The pullback in shares presents a compelling buying opportunity, in our view, given the LT transformation of the gallery network and NT margin and merchandising initiatives," Thomas said. 

RH's valuation is compelling, as it's "one of the most dynamic growth companies," the analyst said. 

The Price Action

Notwithstanding the roughly 17-percent post-earnings pullback, RH shares have added about 46 percent year-to-date.

The stock was trading up 1.9 percent to $128.55 off the open Monday.

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Photo by Restoration Hardware via Wikimedia.