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Why RH Stock Fell 20.2% in May

Steve Symington, The Motley Fool

What happened

Shares of Restoration Hardware parent RH (NYSE: RH) dropped 20.2% in May, according to data from S&P Global Market Intelligence, following an analyst downgrade and the broader market plunge.

To be sure, major market indexes tumbled last month -- including a nearly 7% decline from the S&P 500 -- amid escalating trade tensions and concerns for a global economic slowdown. But around the middle of the month, RH received a push from Gordon Haskett analyst Chuck Grom, who downgraded the stock from hold to reduce, and lowered his share-price target from $100 to $88.

Contemporary room decorated with Restoration Hardware products.

Image source: Restoration Hardware.

So what

The call came even with RH stock still reeling from a massive post-earnings plunge in March, when the company posted mixed quarterly results and reduced its 2019 outlook to call for revenue growth of just 3% to 5% (down from its old 8% to 12% target range).

Returning to the downgrade, to justify his relative bearishness, Grom argued that slowdowns in luxury housing and high-end consumer spending will crimp RH's results, particularly as its bread-and-butter wealthy consumer base is "running out of steam at exactly the wrong time." What's more, he worries that an upcoming convertible debt repayment may put the company "in a tricky position from a leverage standpoint."

Now what

Incidentally, on Tuesday, June 4, Grom followed by upgrading RH back to hold -- but only because the stock was then trading at a modest discount to his reaffirmed $88 price target after its decline last month. 

As it stands, investors will receive more color on whether his skepticism is merited when RH releases fiscal first-quarter 2019 results on Wednesday, June 12, after the market closes. But given the note of caution and the market's decline in the meantime, it was no surprise to see the stock falling hard last month.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.