Shares in home furnishings retailer, RH (NYSE:RH), soared following the release of its quarterly and year end results earlier this week. The gains add to a strong start to 2024, with shares now up about 20% YTD.
The stock’s positive performance in recent months may be indicative of growing optimism by investors surrounding lower interest rates and stronger goods-based demand in the months ahead. RH repurchased 35% of their shares outstanding during 2022 and 2023. The nearly 70% rise since RH’s 52-week lows seems to vindicate the repurchase strategy.
While RH appears to have a number of strategic opportunities ahead, at about 45x forward earnings, I view shares neutrally. I also believe that looser monetary policy won’t necessarily translate to stronger goods-based demand for RH’s product offerings.
Why Did RH Stock Rise Over 15% This Week?
One could be forgiven for overlooking this week’s rise in RH’s stock. The company, after all, did turn in results that landed below expectations on both the top and bottom lines. Investors, however, rightfully focused more on what’s ahead for the company.
And what’s ahead sounds much better for RH than what they’ve been through in fiscal 2023. In his post-earnings commentary, CEO Gary Friedman said that he expected “demand trends to accelerate through 2024”. Supporting this bullishness was his view of the likelihood of positive uptake of recent product transformations and platform expansion.
The latter is especially worth highlighting. In the years ahead, RH expects to increase their operating footprint in attractive markets such as the United Kingdom, Europe, and Australia. With the proper execution, RH should be able to gain sizeable global market share.
Does a more accommodative demand environment and the opportunities ahead warrant the spike in the stock price? Perhaps for some. Others, however, may prefer taking more of a “show-me” stance after RH turned in less inspiring quarterly results.
RH Stock Recent Results
One aspect of RH’s overall miss on revenues was a combination of negative weather externalities, as well as shipping delays encountered due to the ongoing conflict in the Red Sea. The two together contributed to a +$40M headwind during the quarter, a significant aspect of the overall 4.4% YOY decline.
Lower revenues also impacted adjusted gross and operating margins. For the period, gross margins were down 430 basis points from the same period last year. Even more disparate was adjusting operating margins, which came in at 9.1% versus 16.6%. Aside from the lower topline, increased markdown activity was also to blame for the weaker margin profile.
RH is also incurring higher costs related to expansion-based investment. While these upfront outlays in areas such as product transformation and platform expansion are resulting in near-term earnings headwinds, the management team expects to secure a substantial portion of the market in future years. This should bolster both revenue growth and profitability.
RH Stock Outlook And Guidance
In the nearer term, RH expects adverse conditions in the business environment to continue. There is growing optimism, however, on accelerating demand trends due to the prospects of a more accommodative interest rate environment and a resulting rebound in the housing market.
Ongoing product transformation efforts are also seen as holding back overall revenue growth in the nearer term. The revenue lag is ultimately expected to lead to an increased backlog of about +$110M to +$130M. In turn, operating and adjusted margins are expected to be negatively impacted by 140 basis points. Investments to support international expansion are expected to add another 200 basis points of headwind.
Overall, RH sees revenues up between 8% and 10% in fiscal 2024, with adjusted operating and EBITDA margins expected to land at a midpoint of 13.5% and 18.5%, respectively. In Q1, these same two metrics are forecasted to be 6.5% and 12.5%, respectively, at the midpoint.
RH Stock Key Metrics
Shares in RH have gained over 40% in the last year. This includes a 17% increase following recently released results. This has taken the stock towards the upper boundaries of its 52-week range.
While the gains are factoring into positive grading in momentum by Seeking Alpha’s Quant scores, the stock is viewed neutrally overall by both the Quant scores and the broader Analyst community. It’s possible investors see the stock as having largely run its course, trading at about 45x its forward earnings.
Though Wall Street is more bullish, it’s important to note that the current price of RH tracks about 6% ahead of current estimates.
And while RH does grade favorably on its profitability scores, increased investments in international expansion and on product transformation likely will hold back revenue and profitability prospects in the nearer term. An uncertain macro environment also warrants a caution view as to any resulting success in these initiatives.
Is RH Stock A Buy, Sell, Or Hold?
The surge in RH stock following the release of its earnings release likely reflects investors’ optimism about the possibility of lower interest rates and heightened goods-based demand in the periods ahead.
CEO Gary Friedman’s outlook for demand acceleration throughout 2024 also seemed to carry weight in investors’ eyes. Looser monetary policy, however, may not necessarily translate to stronger goods-based demand for RH’s products.
RH’s ongoing product transformations and investments in international expansion offer growth opportunities. But these initiatives are untested in an uncertain operating environment. The investments also appear to be hindering short-term profitability. And at approximately 45x forward earnings, the stock appears fairly valued to me. Accordingly, I view RH as best kept on “hold” for now.
Justin Purohit
Providing timely and quick to the punch analysis of earnings and macro-related events across various sectors, with a focus on retail and real estate. I am a licensed CPA.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
