Embracing the roller-coaster ride of the stock market, RH (NYSE: RH), formerly known as Restoration Hardware, has faced its fair share of challenges amid a turbulent housing market. With the stock plummeting over 50% from its pandemic-induced high and a significant dip in revenue and profit margins, CEO Gary Friedman candidly acknowledged the “most challenging housing market in three decades” in a recent shareholder letter.
1. Positivity in a Recovering Housing Market
Home furnishing sales notoriously dance to the tune of housing transactions – when people move, they often furnish anew. The cyclical nature of the housing market hit a 29-year low in existing home sales last year. Yet, signs of a turnaround peek through the clouds. A nearly 10% surge in February existing home sales from January and relaxation in mortgage rates hint at an upward trajectory.
RH’s anticipation of a tough business environment until a decline in interest rates mirrors broader market sentiments. With the Federal Reserve projecting three rate cuts this year, the path ahead seems clearer. Beyond these immediate changes, the mortgage rate lock-in effect and burgeoning new home construction will likely rebalance housing supply and demand in the long term.
2. Strategic Share Repurchases
Amidst the storm, RH has been diligently repurchasing its shares over the last two years, witnessing a more than 20% reduction in shares outstanding in the past year and a significant 35% over the last couple of years. A visual from a decade ago illuminates a stark reduction in shares outstanding, reflecting the company’s commitment to fortifying its position.
Although the impact of buybacks on earnings per share may not be immediately noticeable during a business slump, a 35% decrease in outstanding shares translates to a remarkable 53% increase in earnings per share. This financial maneuver arms RH to inch closer to its previous peak net income of over $750 million with approximately $500 million, a more attainable goal in the near term.
3. Reaping the Rewards of Strategic Investments
Recent years have seen RH diligently sowing seeds for a bountiful harvest, developing a range of ‘transformative’ products, particularly focusing on outdoor gear, and expanding its geographical presence through new galleries internationally. Venturing into luxury lifestyle facets like restaurants, guesthouses, and innovative media services underscores RH’s endeavor to diversify.
Foreseeing a demand upsurge, RH intensifies its marketing efforts, aiming at a 12% to 14% growth in demand this year. Coupled with an 8% to 10% revenue surge from an order backlog, the company positions itself for a fruitful fiscal year. As the housing market stabilizes and new galleries propel growth, RH stands on the cusp of a promising upswing.
Transitioning through cyclical phases, RH, akin to the housing market, gears up for another growth cycle. With revenue and profits on an upward trajectory, investing in RH appears to be a wise move for those eyeing a fruitful future.
