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RH Stock Down 28% in a Year: What's Next for Investors?
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Shares of (RH - Free Report) (formerly known as Restoration Hardware), a prominent luxury furniture retailer, seem to be very volatile over the past year and are down 27.7% during the period. In contrast, Hoya Capital Housing ETF (HOMZ - Free Report) has gained 3.7% in the same period, which has 20% exposure in the home improvement and furnishings segment. The company is reeling under challenging demand conditions, given the sharply rising mortgage rates.
Closed at $266.92 on Jul 11, RH shares are trading 34.3% below its 52-week high of $406.38 from Aug 3, 2023, but 28.8% above its 52-week low of $207.26 on Nov 1, 2023.
Image Source: Zacks Investment Research
What's Holding RH Back?
RH is currently operating in an extremely challenging housing market, the toughest in three decades. The company witnessed a positive inflection in demand during the first quarter of fiscal 2024, with a 3% increase. However, this growth fell short of RH's expectations for mid-single-digit growth as consumer trends softened following a rise in mortgage rates to 7%. This increase in rates came after the Federal Reserve adopted a more hawkish stance, further straining the already difficult industry environment characterized by high interest rates and a sluggish luxury housing market.
Meanwhile, RH is pursuing an aggressive strategy to enhance its brand reputation through significant investments aimed at driving long-term growth. The company's vision is to establish itself as a global thought leader in the interior design space by creating a comprehensive luxury experience that extends beyond just furniture sales. However, this ambitious strategy, coupled with declining home sales, has adversely affected short-term financial results. According to chairman and CEO Gary Friedman, the ongoing investment activities represent the most substantial product transformation and platform expansion in RH's history, suggesting confidence in future momentum despite the current market challenges.
Financially, RH's performance in the first quarter of 2024 reflects the impact of these market conditions and strategic choices. The company reported net revenues of $727 million, a 1.7% decrease year over year, which is relatively resilient given the prevailing difficulties in the furniture sector. However, RH's profit margins were disappointing. The cost of goods sold increased compared to the previous year despite the decline in revenues, leading to a 350 basis point (bps) contraction in gross margin.
Additionally, adjusted selling, general, and administrative expenses rose 490 bps, resulting in an adjusted operating margin of only 6.5%, an 840 bps decline. These financial pressures have led to lower-than-expected profits, underscoring the immediate challenges RH faces amidst its long-term strategic transformation.
Downward Estimates Revision Trend
Analysts are showing reduced confidence in the stock, as indicated by recent downward revisions in earnings estimates. Among nine analysts covering the stock, seven have adjusted their forecasts downward for fiscal 2024. Looking ahead to fiscal 2025, six out of 10 analysts have also lowered their projections. Over the last 60 days, forecasts for fiscal 2024 and 2025 have declined 11.4% and 6.3%, respectively.
Image Source: Zacks Investment Research
Factors Acting in Favor of RH
RH stands at the tip of a transformative era driven by strategic investments and visionary expansion plans. The company’s recent moves reflect a bold and ambitious strategy that positions RH to capture significant market share in North America and lay the groundwork for expansive global growth.
RH’s investment in what it terms the “most prolific product transformation and platform expansion in history” is a game-changer. By reinventing its product lines and enhancing its platforms, RH is not merely staying relevant but is setting new standards in the industry. This transformation is expected to resonate strongly with consumers, driving increased demand and solidifying RH’s position as a leader in the high-end furniture market.
With these innovative changes, RH is poised to seize a larger slice of the North American market. Looking beyond North America, RH’s sights are set on the United Kingdom, Europe, Australia, and the Middle East. These regions represent vast untapped potential for RH’s luxury offerings. The strategic timing of this expansion is particularly noteworthy. By entering these markets during a period of global economic disruption, RH is positioned to secure prime locations and establish a strong presence ahead of competitors.
RH’s aggressive investment strategy during economic downturns underscores its long-term vision. While such investments can impact short-term results, they are a calculated move to leverage opportunities that arise from market dislocations. Notably, the downturn has already led to the exit of several online furniture brands that struggled with profitability. This thinning of competition provides RH with a unique opportunity to capture market share that would have otherwise been contested.
RH’s comprehensive approach — combining transformative product development, strategic market expansion, and opportunistic investments during downturns — positions the company for substantial growth. As RH continues to innovate and expand, it is set to emerge as a dominant force in the global luxury furniture market.
RH Trading Above 50-Day Moving Average
Meanwhile, technical indicators suggest strong performance for RH. The stock is trading above its 50-day moving average, signaling a bullish trend.
Image Source: Zacks Investment Research
RH Stock Not Cheap
RH is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 24.04, which is significantly above its five-year median of 20.30. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about RH's future earnings. Such a high valuation compared to historical levels raises concerns about the sustainability of its current price, potentially setting the stage for a market correction if the company's future performance fails to meet these lofty expectations.
Even the stock is trading higher than companies like Lowe's Companies, Inc. (LOW - Free Report) , The Home Depot, Inc. (HD - Free Report) and Williams-Sonoma, Inc. (WSM - Free Report) . LOW, HD and WSM are trading with forward 12-month P/E multiple of 17.98, 22.57 and 9.38, respectively.
Investment Thought: Hold or Fold?
RH is actively pursuing an ambitious strategy to enhance its brand reputation through substantial investments in key growth areas. The company aims to establish itself as a leading global authority in interior design. Positive signs of increasing demand following brand and product updates are promising, setting the stage for a stronger performance in the second half of 2024. RH anticipates demand to accelerate further as the year progresses, driven by new product launches, expanded mailings of sourcebooks, and early indicators of heightened interest, particularly in the Outdoor category.
During the first quarter of 2024, RH reaffirmed its revenue guidance, projecting growth of 8%-10% on a 52-week basis (adjusted for the 53rd week in 2023) or 6%-8% on a reported basis. RH's outlook anticipates a substantial mid-year upturn, implying a very sharp double-digit sales and demand ramp in the second half. This uptick will be supported by the introduction of refreshed product collections and new gallery openings.
In June, CEO Gary Friedman demonstrated confidence in RH's future by purchasing more than $10 million of the company's shares, boosting his ownership to over a quarter of all outstanding shares. This significant insider buy can be considered a bullish signal, as it demonstrates increased confidence in the company's future.
While RH appears well-positioned for a potential rebound in high-end housing sales, the timing of such a recovery remains uncertain. Key risks include ongoing pressures in the housing market, competitive pricing strategies, and uncertainties related to international expansion efforts. RH anticipates ending the year with a backlog of approximately $110 to $130 million, reflecting demand outpacing revenues for fiscal 2024, which will impact operating and adjusted EBITDA margins negatively.
Despite optimism about RH's product initiatives and market expansion, cautiousness remains regarding the company's aggressive growth targets and the execution risks associated with numerous new products. Current holders of RH stock, rated Zacks Rank #3 (Hold), are advised to retain their positions. Given market uncertainties, potential volatility in promotions, international expansion costs, and high valuation, potential investors are advised to wait for a more favorable entry point into RH.
Image: Bigstock
RH Stock Down 28% in a Year: What's Next for Investors?
Shares of (RH - Free Report) (formerly known as Restoration Hardware), a prominent luxury furniture retailer, seem to be very volatile over the past year and are down 27.7% during the period. In contrast, Hoya Capital Housing ETF (HOMZ - Free Report) has gained 3.7% in the same period, which has 20% exposure in the home improvement and furnishings segment. The company is reeling under challenging demand conditions, given the sharply rising mortgage rates.
Closed at $266.92 on Jul 11, RH shares are trading 34.3% below its 52-week high of $406.38 from Aug 3, 2023, but 28.8% above its 52-week low of $207.26 on Nov 1, 2023.
Image Source: Zacks Investment Research
What's Holding RH Back?
RH is currently operating in an extremely challenging housing market, the toughest in three decades. The company witnessed a positive inflection in demand during the first quarter of fiscal 2024, with a 3% increase. However, this growth fell short of RH's expectations for mid-single-digit growth as consumer trends softened following a rise in mortgage rates to 7%. This increase in rates came after the Federal Reserve adopted a more hawkish stance, further straining the already difficult industry environment characterized by high interest rates and a sluggish luxury housing market.
Meanwhile, RH is pursuing an aggressive strategy to enhance its brand reputation through significant investments aimed at driving long-term growth. The company's vision is to establish itself as a global thought leader in the interior design space by creating a comprehensive luxury experience that extends beyond just furniture sales. However, this ambitious strategy, coupled with declining home sales, has adversely affected short-term financial results. According to chairman and CEO Gary Friedman, the ongoing investment activities represent the most substantial product transformation and platform expansion in RH's history, suggesting confidence in future momentum despite the current market challenges.
Financially, RH's performance in the first quarter of 2024 reflects the impact of these market conditions and strategic choices. The company reported net revenues of $727 million, a 1.7% decrease year over year, which is relatively resilient given the prevailing difficulties in the furniture sector. However, RH's profit margins were disappointing. The cost of goods sold increased compared to the previous year despite the decline in revenues, leading to a 350 basis point (bps) contraction in gross margin.
Additionally, adjusted selling, general, and administrative expenses rose 490 bps, resulting in an adjusted operating margin of only 6.5%, an 840 bps decline. These financial pressures have led to lower-than-expected profits, underscoring the immediate challenges RH faces amidst its long-term strategic transformation.
Downward Estimates Revision Trend
Analysts are showing reduced confidence in the stock, as indicated by recent downward revisions in earnings estimates. Among nine analysts covering the stock, seven have adjusted their forecasts downward for fiscal 2024. Looking ahead to fiscal 2025, six out of 10 analysts have also lowered their projections. Over the last 60 days, forecasts for fiscal 2024 and 2025 have declined 11.4% and 6.3%, respectively.
Image Source: Zacks Investment Research
Factors Acting in Favor of RH
RH stands at the tip of a transformative era driven by strategic investments and visionary expansion plans. The company’s recent moves reflect a bold and ambitious strategy that positions RH to capture significant market share in North America and lay the groundwork for expansive global growth.
RH’s investment in what it terms the “most prolific product transformation and platform expansion in history” is a game-changer. By reinventing its product lines and enhancing its platforms, RH is not merely staying relevant but is setting new standards in the industry. This transformation is expected to resonate strongly with consumers, driving increased demand and solidifying RH’s position as a leader in the high-end furniture market.
With these innovative changes, RH is poised to seize a larger slice of the North American market. Looking beyond North America, RH’s sights are set on the United Kingdom, Europe, Australia, and the Middle East. These regions represent vast untapped potential for RH’s luxury offerings. The strategic timing of this expansion is particularly noteworthy. By entering these markets during a period of global economic disruption, RH is positioned to secure prime locations and establish a strong presence ahead of competitors.
RH’s aggressive investment strategy during economic downturns underscores its long-term vision. While such investments can impact short-term results, they are a calculated move to leverage opportunities that arise from market dislocations. Notably, the downturn has already led to the exit of several online furniture brands that struggled with profitability. This thinning of competition provides RH with a unique opportunity to capture market share that would have otherwise been contested.
RH’s comprehensive approach — combining transformative product development, strategic market expansion, and opportunistic investments during downturns — positions the company for substantial growth. As RH continues to innovate and expand, it is set to emerge as a dominant force in the global luxury furniture market.
RH Trading Above 50-Day Moving Average
Meanwhile, technical indicators suggest strong performance for RH. The stock is trading above its 50-day moving average, signaling a bullish trend.
Image Source: Zacks Investment Research
RH Stock Not Cheap
RH is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 24.04, which is significantly above its five-year median of 20.30. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about RH's future earnings. Such a high valuation compared to historical levels raises concerns about the sustainability of its current price, potentially setting the stage for a market correction if the company's future performance fails to meet these lofty expectations.
Even the stock is trading higher than companies like Lowe's Companies, Inc. (LOW - Free Report) , The Home Depot, Inc. (HD - Free Report) and Williams-Sonoma, Inc. (WSM - Free Report) . LOW, HD and WSM are trading with forward 12-month P/E multiple of 17.98, 22.57 and 9.38, respectively.
Investment Thought: Hold or Fold?
RH is actively pursuing an ambitious strategy to enhance its brand reputation through substantial investments in key growth areas. The company aims to establish itself as a leading global authority in interior design. Positive signs of increasing demand following brand and product updates are promising, setting the stage for a stronger performance in the second half of 2024. RH anticipates demand to accelerate further as the year progresses, driven by new product launches, expanded mailings of sourcebooks, and early indicators of heightened interest, particularly in the Outdoor category.
During the first quarter of 2024, RH reaffirmed its revenue guidance, projecting growth of 8%-10% on a 52-week basis (adjusted for the 53rd week in 2023) or 6%-8% on a reported basis. RH's outlook anticipates a substantial mid-year upturn, implying a very sharp double-digit sales and demand ramp in the second half. This uptick will be supported by the introduction of refreshed product collections and new gallery openings.
In June, CEO Gary Friedman demonstrated confidence in RH's future by purchasing more than $10 million of the company's shares, boosting his ownership to over a quarter of all outstanding shares. This significant insider buy can be considered a bullish signal, as it demonstrates increased confidence in the company's future.
While RH appears well-positioned for a potential rebound in high-end housing sales, the timing of such a recovery remains uncertain. Key risks include ongoing pressures in the housing market, competitive pricing strategies, and uncertainties related to international expansion efforts. RH anticipates ending the year with a backlog of approximately $110 to $130 million, reflecting demand outpacing revenues for fiscal 2024, which will impact operating and adjusted EBITDA margins negatively.
Despite optimism about RH's product initiatives and market expansion, cautiousness remains regarding the company's aggressive growth targets and the execution risks associated with numerous new products. Current holders of RH stock, rated Zacks Rank #3 (Hold), are advised to retain their positions. Given market uncertainties, potential volatility in promotions, international expansion costs, and high valuation, potential investors are advised to wait for a more favorable entry point into RH.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.