This retail stock is expected to move more than 13% on earnings this week. How to trade it

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3 hours ago

RH's unique position, with a high-end assortment, relative scale, and a small share of the home furnishings market, leaves room for long-term growth. However, the weak U.S. housing market is a significant headwind. This is something CEO Gary Friedman acknowledged on the earnings conference call last quarter… "While we expect a higher-risk business environment this year due to the uncertainty caused by tariffs, market volatility, and inflation risk, we believe it's important to separate the signal from the noise. The fact is, we've been operating in the worst housing market in almost 50 years. For context, in 1978, there were 4.09 million existing homes sold when the US had a population of 223 million. Contrast that to 2024, where 4.06 million existing homes sold with a population of 341 million, and it illuminates just how depressed the housing market has been this past year." RH , which reports Thursday, is moving forward with its hospitality and international expansion strategy, which could lead to a more substantial market share over time, but carries risks, including high costs. This, combined with elevated marketing expenses, may put pressure on the operating margin this year. RH's premium branding and positioning as a luxury lifestyle curator insulate it from discount-driven competitors, and appeal to high-income consumers who are theoretically resilient to economic slowdowns. For the time being, luxury spending has remained robust. Tariff impact The company's vertical integration — controlling design, manufacturing, and retail — drives high margins, with adjusted operating margins averaging 14% over the past few quarters. International expansion into Europe and Asia, initiated in 2024, taps new high-net-worth markets, with early success in London and Paris galleries signaling strong growth potential. RH's experiential retail model, which includes RH Guesthouses and design offices, enhances brand loyalty and diversifies revenue streams beyond traditional retail. Although affluent consumers may not need to curb spending during economic downturns, that does not mean that they won't. Spending at luxury home goods retailers is discretionary. Tariffs potentially compound this. Tariffs, particularly 35% on Chinese imports, threaten margins, as 40% of RH's supply chain is overseas. April 2025's earnings miss ($1.90/share vs. $2.10 expected) and a 44% stock drop underscore tariff sensitivity, with Q1 2025 guidance cut 20% due to cost pressures. RH's $3.9 billion debt, coupled with high capital expenditures for international galleries, strains cash flow in a rising-rate environment. CapEx has risen from approximately $111 million for the fiscal year ended January 2021 to nearly $231 million over the twelve months ended February 1, 2022. Net debt has roughly doubled over the past five years, and the $30.4 million in cash, which the company reported last quarter, doesn't seem like a substantial cushion given the nearly $70 million in negative free cash flow the company reported for the most recently reported quarter. Although the company has approximately $950 million remaining in its share repurchase program, investors should not anticipate significant open-market purchases by the company, given its current cash flow. If anything, the $1 billion buyback in 2023 and $1.25 billion in 2024 now look ill-timed; hindsight is 20/20. The trade The good news is that the company's valuation is at the lower end of the five-year range. RH is trading at ~ 18.7x forward earnings estimates, which is well below the five-year average of 26x (although the lows in mid-2022 were less than 10x). The enterprise value-to-sales ratio is just over 2x, 12% higher than the 5-year lows also seen in mid-2022. The earnings-related implied move of ~13.8% is the highest in the past 12 reported quarters. RH reports after the bell Thursday. While it may be tempting to sell that elevated premium, it is elevated for a reason. Therefore, it's necessary to hedge any short-term option sales with some longer-term purchases if earnings provide more shocking surprises, whether good or bad whether one is betting on an upside post-earnings move with a calendar call spread, a downside move with a calendar put spread, or a move in either direction, which can be accomplished with a strangle-swap, illustrated in the example below… Buy RH Sep. 19 $240 call Buy RH Sep. 19 $150 put Sell RH July 18 $150 put Sell RH July 18 $240 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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