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Bull of the Day: RH (RH)

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·5 min read
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RH (RH), formally known as Restoration Hardware, posted blowout Q4 fiscal 2020 financial results on March 24. The stock has soared 17% since then and it touched brand new records Monday. The big post-earnings release climb is part of a much longer and bigger run that has seen the high-end retailer soar nearly 500% in the past three years.

Growing Luxury Portfolio

RH is a high-end furniture and home décor powerhouse that has thrived in a changing retail landscape by keeping it old-school. The company still has 2,500-page catalogs and it has opened large, luxury-centered stores, many with accompanying bars and restaurants in major cities from Chicago to New York. RH is also trying to expand its international business.

RH clearly understands what its affluent clientele wants in the Amazon (AMZN) era. And Wall Street was pleased to hear about its huge expansion efforts.

Chief executive Gary Friedman teased RH’s plans to enter the housing and hotel market in a letter to shareholders in the summer of 2020. “Our Hospitality efforts will continue to elevate the RH brand as we move beyond the four walls of our Galleries into RH Guesthouses where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion hotel industry,” Friedman wrote.

“Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences.”

RH provided updates about its plans to push beyond traditional brick-and-mortar retail on March 24. The company said its first RH Guesthouse is set to open in New York City in the fall of 2021, with a location in Aspen to follow.

The Colorado location is set to feature its first RH Bath House & Spa as well. RH also noted that it plans to expand its international footprint with “the openings of RH England and RH Paris in 2022.”

Other Fundamentals

RH has grown its revenue at a solid clip since its debut on the public markets in 2012, with its FY20 sales up 8% to $2.85 billion. The firm has also expanded its gross margins, with its 2020 gross margin at 46.5%, up from 41.4% in the year-ago period.

The company is also far more confident about its ability to grow this year. RH said when it reported its Q4 results that its FY21 revenue should grow by between 15% to 20%. This comes in well above the 10% growth analysts projected prior to its recent release and it would represent its strongest top-line expansion since FY15. Meanwhile, Zacks estimates call for its adjusted FY21 earnings to climb 16%.

RH executives are more positive based on the growth of the housing market and the continued ability for wealthy people and families to buy larger homes and spend on various home upgrades. The idea is relatively straightforward: larger homes require far more furniture and home décor.

Last year, home sales hit their highest levels since 2006. Better yet, the housing growth/update spending is likely to continue since millennials are now driving the housing market. And the pandemic has had far less impact on higher-income Americans, which bodes well for RH.

These conditions have helped elevate the Zacks Retail-Home Furnishings space that also includes Ethan Allen (ETH), Tempur Sealy (TPX), Williams-Sonoma (WSM), and others. The space now sits in the top 1% of our over 250 Zacks industries.

The luxury furniture firm’s shares have skyrocketed nearly 400% in the last year to destroy fellow coronavirus stars such as Shopify (SHOP). And the recent success is part of a larger run that seen RH soar nealry 1,300% in the past five years.

Bottom Line

As we mentioned at the outset, RH has surged around 16% since its March 24 release and it touched new highs of $610 a share Monday, before slipping over 2% during regular hours to $565.90 a share.

Despite its outperformance, the stock has continually traded at a discount to its industry in terms of forward earnings. And at 27.5X forward 12-month EPS, RH trades at a 10% discount to its own year-long high.

Investors should know that Warren Buffett’s Berkshire Hathaway took a position in RH last year and 11 of the 14 broker ratings Zacks has for the stock are “Strong Buys.” Plus, RH’s positive earnings revisions help it grab a Zacks Rank #1 (Strong Buy), alongside its “A” grade for Momentum and its “B” for Growth in our Style Score system.

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WilliamsSonoma, Inc. (WSM) : Free Stock Analysis Report

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RH (RH) : Free Stock Analysis Report

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