Solid Performance From RH, but Shares Pricey

No-moat

At the time, we raised our fair value estimate to $81 from $53 per share after incorporating lower capital expenditures (accounting for $14 of the increase), better near-term performance (adding $5 to our prior fair value estimate), and operating efficiencies ahead (fewer distribution centers to manage, improved SKU management), leading to operating margin expansion (providing the remainder of the hike). With the fourth quarter outlook unchanged ($655 million-$680 million in revenue and $1.31-$1.51 in EPS) we don’t plan any material change to our $81 fair value estimate and still view shares as pricey, trading at 18 times our tax-adjusted 2018 EPS estimate.

Gross margin performance in the quarter was solid, expanding 460 basis points to 36.9% after contracting 440 basis points in third-quarter 2016, lapping the SKU rationalization that was undertaken in 2016. The SG&A ratio was a bit better than we anticipated, at 28.8%, ticking down a modest 20 basis points, but still inflated from 2015 levels as the company reinvests in improving the supply chain. While we expect healthy operating margin gains in 2018, with RH returning to more normalized levels, we expect gains to moderate thereafter, with operating margins reaching about 10% over our long-term outlook.

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