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RH Stock Soars 36% in a Month: Should You Buy Now or Wait?
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RH (RH - Free Report) , previously known as Restoration Hardware), a leading luxury furniture retailer, has seen a significant boost, with its shares gaining 36.1% over the past month. This surge is likely due to increased consumer interest in the company's new product assortment.
RH’s momentum was also far better than other furniture and home-related peers, like Arhaus, Inc. (ARHS - Free Report) , down 2.8%), Wayfair Inc. (W - Free Report) , up 26.6%), and Williams-Sonoma, Inc. (WSM - Free Report) , up 15.8%) over the past month. Also, in contrast, Hoya Capital Housing ETF (HOMZ - Free Report) has gained just 4.4% in the same period, which has 20% exposure in the home improvement and furnishings segment.
Closed at $334.42 on Oct. 2, RH shares are trading just 5.8% below its 52-week high of $354.86 and above significantly 61.4% from its 52-week low of $207.26.
One-Month Performance
Image Source: Zacks Investment Research
The stock is currently trading above both its 50-day and 200-day moving averages, indicating strong investor confidence and a favorable market outlook.
Image Source: Zacks Investment Research
Factors Acting in Favor of RH
Demand for RH's products increased 7% in the second quarter of fiscal 2024 and continued to rise, finishing July with a 10% gain and August up by 12%. This demand growth is notable despite the tough housing market, indicating that RH’s product and platform strategy is resonating with its high-end consumer base. For the fiscal third quarter, demand is expected to grow 12-14% and net revenue is projected to grow 7-9%, showing a significant sequential improvement from 3.6% growth recorded in the fiscal second quarter. The commitment to product quality and innovation has enabled RH to outperform competitors by 15-25 percentage points. RH leadership anticipates that demand trends will continue strengthening throughout fiscal 2024 and into 2025 (read more: RH's Q2 Earnings & Revenues Beat Estimates).
RH has invested heavily in product transformation and platform expansion. This includes new RH Interiors Sourcebook mailings and the consolidation of product lines to streamline consumer engagement. The company's physical product sourcebooks are significant in driving demand by focusing on deep, curated mailings rather than digital promotions.
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 despite the weak housing market.
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.
What May Hold RH Back?
RH is currently operating in an extremely challenging housing market, the toughest in three decades. While RH has experienced strong demand growth, revenue has not kept pace due to issues such as backorders and extended special order lead times. The company expects revenues to trail demand by 4 to 8 points during fiscal 2024, which could lead to a disconnect between actual sales and consumer interest. RH expects to end fiscal 2024 with a backlog of $80 to $100 million in orders that have not been fulfilled. This backlog not only negatively impacts revenue but also creates customer dissatisfaction due to longer waiting times.
The revenue lag and increased backlog are expected to reduce adjusted operating margins and EBITDA margins by approximately 100 basis points (bps) for fiscal 2024. In the long term, this could pressure profitability if RH is unable to catch up with demand fulfillment.
Expanding into new international markets like Paris, London, and Milan requires significant capital outlay, including setting up large-format galleries, building local logistics networks, and marketing to new audiences. These investments are crucial for long-term growth, but in the near term, they are dragging down profitability. For fiscal 2024, international expansion investments are estimated to create a 230-bps drag on margins.
RH has taken on a considerable amount of debt to fund its platform expansion, including investments in new galleries and global growth initiatives. As of the fiscal second quarter, RH’s total debt stood at $2.5 billion, a significant liability that requires careful management.
RH is also grappling with rising operational costs, particularly in its selling, general, and administrative (SG&A) expenses, which grew 500 bps in the fiscal second quarter from a year ago, thereby reducing overall profitability. RH has been expanding its workforce, especially as it opens new galleries and design studios. The increased labor costs, along with higher overhead expenses for managing larger, more complex retail spaces, have contributed to a rise in SG&A.
Downward Estimates Revision Trend for RH
Analysts have revised their earnings estimates downward, as shown in the chart below. Despite improved revenue performance through the fiscal second quarter, RH has reduced its full-year guidance. The company now projects an adjusted operating margin of 11-12%, down from the previously expected 13-14%, due to lowered total revenue growth forecasts (now 5-7%, compared to the earlier 8-10%). The full-year operating margin guidance reflects ongoing challenges, including demand outpacing revenue and the costs of international expansion, contributing to headwinds of roughly 100 bps and 230 bps, respectively.
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 32.63, which is significantly above its three-year median of 23.88. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about RH's future earnings.
Even the stock is trading higher than stocks like ARHS and WSM, which are trading with forward 12-month P/E multiples of 18.83 and 18.65, respectively.
Investment Thought: Hold or Fold?
RH's growth strategy is driven by its aggressive long-term investments in product innovation, global expansion, experiential retail, and technology. These efforts, coupled with its ability to navigate a challenging housing market, set the brand apart and support steady demand growth. As broader economic conditions improve, RH is well-positioned to capture significant market share, solidifying its status as a leader in the global luxury home furnishings sector.
We view RH's demand trends as a key differentiator, with consistent acceleration expected ahead of more favorable macroeconomic conditions. This could reignite investors’ confidence in its long-term growth potential.
Despite a downward revision to its full-year outlook due to weaker housing trends, the market reacted positively, with margins faring better than anticipated in a highly promotional environment. Management also highlighted robust demand growth, even as the broader industry faces declines.
However, elevated inventory levels present a significant challenge. Additional internal concerns include managing supply chains, meeting demand, and addressing rising costs associated with global expansion and operational complexity. We recommend investors wait for more sustained improvements in sales and earnings before adopting a more bullish outlook on the stock. For current RH stockholders with a Zacks Rank #3 (Hold), retaining positions is advised. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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RH Stock Soars 36% in a Month: Should You Buy Now or Wait?
RH (RH - Free Report) , previously known as Restoration Hardware), a leading luxury furniture retailer, has seen a significant boost, with its shares gaining 36.1% over the past month. This surge is likely due to increased consumer interest in the company's new product assortment.
RH’s momentum was also far better than other furniture and home-related peers, like Arhaus, Inc. (ARHS - Free Report) , down 2.8%), Wayfair Inc. (W - Free Report) , up 26.6%), and Williams-Sonoma, Inc. (WSM - Free Report) , up 15.8%) over the past month. Also, in contrast, Hoya Capital Housing ETF (HOMZ - Free Report) has gained just 4.4% in the same period, which has 20% exposure in the home improvement and furnishings segment.
Closed at $334.42 on Oct. 2, RH shares are trading just 5.8% below its 52-week high of $354.86 and above significantly 61.4% from its 52-week low of $207.26.
One-Month Performance
Image Source: Zacks Investment Research
The stock is currently trading above both its 50-day and 200-day moving averages, indicating strong investor confidence and a favorable market outlook.
Image Source: Zacks Investment Research
Factors Acting in Favor of RH
Demand for RH's products increased 7% in the second quarter of fiscal 2024 and continued to rise, finishing July with a 10% gain and August up by 12%. This demand growth is notable despite the tough housing market, indicating that RH’s product and platform strategy is resonating with its high-end consumer base. For the fiscal third quarter, demand is expected to grow 12-14% and net revenue is projected to grow 7-9%, showing a significant sequential improvement from 3.6% growth recorded in the fiscal second quarter. The commitment to product quality and innovation has enabled RH to outperform competitors by 15-25 percentage points. RH leadership anticipates that demand trends will continue strengthening throughout fiscal 2024 and into 2025 (read more: RH's Q2 Earnings & Revenues Beat Estimates).
RH has invested heavily in product transformation and platform expansion. This includes new RH Interiors Sourcebook mailings and the consolidation of product lines to streamline consumer engagement. The company's physical product sourcebooks are significant in driving demand by focusing on deep, curated mailings rather than digital promotions.
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 despite the weak housing market.
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.
What May Hold RH Back?
RH is currently operating in an extremely challenging housing market, the toughest in three decades. While RH has experienced strong demand growth, revenue has not kept pace due to issues such as backorders and extended special order lead times. The company expects revenues to trail demand by 4 to 8 points during fiscal 2024, which could lead to a disconnect between actual sales and consumer interest. RH expects to end fiscal 2024 with a backlog of $80 to $100 million in orders that have not been fulfilled. This backlog not only negatively impacts revenue but also creates customer dissatisfaction due to longer waiting times.
The revenue lag and increased backlog are expected to reduce adjusted operating margins and EBITDA margins by approximately 100 basis points (bps) for fiscal 2024. In the long term, this could pressure profitability if RH is unable to catch up with demand fulfillment.
Expanding into new international markets like Paris, London, and Milan requires significant capital outlay, including setting up large-format galleries, building local logistics networks, and marketing to new audiences. These investments are crucial for long-term growth, but in the near term, they are dragging down profitability. For fiscal 2024, international expansion investments are estimated to create a 230-bps drag on margins.
RH has taken on a considerable amount of debt to fund its platform expansion, including investments in new galleries and global growth initiatives. As of the fiscal second quarter, RH’s total debt stood at $2.5 billion, a significant liability that requires careful management.
RH is also grappling with rising operational costs, particularly in its selling, general, and administrative (SG&A) expenses, which grew 500 bps in the fiscal second quarter from a year ago, thereby reducing overall profitability. RH has been expanding its workforce, especially as it opens new galleries and design studios. The increased labor costs, along with higher overhead expenses for managing larger, more complex retail spaces, have contributed to a rise in SG&A.
Downward Estimates Revision Trend for RH
Analysts have revised their earnings estimates downward, as shown in the chart below. Despite improved revenue performance through the fiscal second quarter, RH has reduced its full-year guidance. The company now projects an adjusted operating margin of 11-12%, down from the previously expected 13-14%, due to lowered total revenue growth forecasts (now 5-7%, compared to the earlier 8-10%). The full-year operating margin guidance reflects ongoing challenges, including demand outpacing revenue and the costs of international expansion, contributing to headwinds of roughly 100 bps and 230 bps, respectively.
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 32.63, which is significantly above its three-year median of 23.88. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about RH's future earnings.
Even the stock is trading higher than stocks like ARHS and WSM, which are trading with forward 12-month P/E multiples of 18.83 and 18.65, respectively.
Investment Thought: Hold or Fold?
RH's growth strategy is driven by its aggressive long-term investments in product innovation, global expansion, experiential retail, and technology. These efforts, coupled with its ability to navigate a challenging housing market, set the brand apart and support steady demand growth. As broader economic conditions improve, RH is well-positioned to capture significant market share, solidifying its status as a leader in the global luxury home furnishings sector.
We view RH's demand trends as a key differentiator, with consistent acceleration expected ahead of more favorable macroeconomic conditions. This could reignite investors’ confidence in its long-term growth potential.
Despite a downward revision to its full-year outlook due to weaker housing trends, the market reacted positively, with margins faring better than anticipated in a highly promotional environment. Management also highlighted robust demand growth, even as the broader industry faces declines.
However, elevated inventory levels present a significant challenge. Additional internal concerns include managing supply chains, meeting demand, and addressing rising costs associated with global expansion and operational complexity. We recommend investors wait for more sustained improvements in sales and earnings before adopting a more bullish outlook on the stock. For current RH stockholders with a Zacks Rank #3 (Hold), retaining positions is advised. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.