Is Restoration Hardware Stock A Buy?

Restoration Hardware Holdings Inc (NYSE:RH) is a Corte Madera, California-based home furnishing retailer. The company has a footprint of over 100 stores, and grew from the depths of its share price correction in 2020 by over 400 percent in the year thereafter.

The push to work and school from home pushed a lot of people to buy new furniture for their homes. Now many investors are looking to it as a possible recovery play too. But is Restoration Hardware stock a buy?

The stock’s price rose towards $700 in 2021, a remarkable escalation after starting 2020 at under $200 per share. This is clearly a “pandemic stock” more so than a “recovery stock”, as people are less likely to need furniture while traveling, going to the office, and more.

Although home furnishing isn’t all the company sells, it’s the meat and potatoes. That means it’s competing both with established brick-and-mortar companies like Pottery Barn, Ashley Furniture, and Ikea, along with online furniture like Joybird, Article, and Purple Mattress.

Still, the transformation into luxury furniture retailer RH – along with a slew of cost-cutting measures – put RH on the map of investors seeking growth moving forward.

And it’s easy to see what’s attracting investors.

Restoration Hardware Market Share Is Small But…

The United States furniture and home furnishings market is a $120.5 billion market, which accounts for 12.2 percent of the country’s total retail e-commerce sales.

IKEA is the leading furniture retailer, with $5.33 billion in annual revenue in the United States. Meanwhile, Williams-Sonoma’s $6.8 billion net revenue total makes it the worldwide leader.

Ashley HomeStores has the largest brick-and-mortar retail footprint with 722 stores worldwide.

By comparison, Restoration Hardware reported full-year net revenues of $2.84 billion in 2020 and has 70 galleries and 36 outlet stores in the U.S. and Canada. This is an impressive feat, but the company is by no means nor measurement the market leader.

CEO Gary Friedman became a billionaire working for the company, with a $4.6 billion estimated net worth. He owns 10 percent of the company with another 18 percent in options, which could bring is value even higher, considering the company’s ballpark $15 billion market capitalization.

But if it wants to grow, RH needs to separate itself from the pack. 

Does Restoration Hardware Stock Have a Moat?

Restoration Hardware share price suggests it’s been smooth sailing but it has struggled operationally to come to terms with the fallout from the pandemic. The company’s galleries are massive showrooms with expensive amenities, and Friedman was forced to lay off 440 employees while furloughing 2,300 more temporarily to weather the storm.

However, things quickly turned around, and the company’s share prices rebounded rapidly from the lows. And it pushed through the end of the year to open even more galleries.

The company also expanded into other luxury businesses, like its RH3 luxury yacht and RH Guesthouses hotel chain. And it’s including services like landscaping design, interior design, and architecture to its in-store services. This makes it a luxury Home Depot (HD) or Lowes.

By expanding its services to hone in on upselling luxury clients across the board, the RH branding play should pay off moving forward. Indeed as the wealth gap widens ultra-wealthy have more money to spend at this growing retailer.

Will Restoration Hardware Revenues Go Up?

Restoration Hardware grew revenues over the past year, which makes it a rarity among brick-and-mortar retailers. Its 2020 net revenue of $2.84 billion is a slight 8 percent year-over-year increase from $2.64 billion earned in 2019.

The company also increased year-over-year free cash flow by 23 percent from $405 million to $330 million. In the fourth quarter alone, the company’s net revenues of $812.4 million represent at 22-percent year-over-year increase from the prior year.

In its year-end report, management stated that they believe brands will become more valuable moving forward. Supply-chain disruptions due to lockdowns did little to interrupt business as most of its core business revenue is direct-to-consumer. This helped the stock price rival, and in some cases beat, even many of the most popular brands, like Apple (AAPL), Amazon (AMZN), Google (GOOG), and Facebook (FB), over the past decade.

This has bullish analysts excited about the company’s prospects, but it’s important to understand what RH has in its favor moving forward too.

Are Restoration Hardware Earnings Rising?

GAAP-adjusted margins increased from 41.4 percent to 46.5 percent. This helped the company increase its operating margin from 13.7 percent to 16.4 percent.

This occurred due to the company’s commitment to efficiency and optimization. It reacted swiftly to the fallout from health advisories and made the necessary adjustments to staffing and operations to survive. This helped it grow net income by 23 percent from $220.4 million in 2019 to $271.8 million in 2020.

And the fourth quarter was a big push on that, showing 90 percent growth from $68.4 million to $130.2 million. This can be attributed to increased holiday sales, pandemic relief bills, and much more that occurred over the winter. But above all, the C-suite is responsible for directing a company’s performance through tough times.

Who Is Restoration Hardware CEO?

Friedman started his retail career as a stock boy at a Gap store in Santa Rosa, California. He dropped out of school after receiving a D and being told by his teacher that he was wasting his time. History would agree that school wasn’t the best use of his time; he went on to manage 63 Gap stores as a regional manager for the company.

From there, he took a job as president of the Williams-Sonoma and Pottery Barn brands. Under his leadership, Pottery Barn grew from a $50 million business to a $1 billion furniture sales empire.

He’s responsible for creating many of the company’s most successful business ventures, like Williams-Sonoma Grande Cuisine. He also spent three years helping create the West Elm brand. But he left to lead Restoration Hardware in 2001 before it launched.

Friedman transformed the company from a near-bankrupt kitsch company to a luxury furniture brand. It raised prices during the 2008 recession and looks on the way to steering through the 2020s just as deftly. Of course, there are plenty of obstacles in the way.

Is Restoration Hardware Strategy Right?

The elephant in the room for the CEO’s vision is just how much luxury yachts or high-end furniture will be in demand. Furniture sales grew because people were stuck at home, often by government order. When those orders expire and the world goes back to some level of normalcy, there’s a chance these sales will go down.

And people have voiced their need for travel, which is where the company offers its yachts and hotel services. Each of these delayed openings due to forced travel restrictions.

Nevertheless, with so many diversified businesses it will be interesting to see how RH succeeds moving forward. On the whole, Wall Street analysts believe RH share price will be on an upward trajectory.

Is Restoration Hardware Stock A Buy?

Restoration Hardware transformed from a kitschy household goods brand into the luxury RH retailer. It has a solid online presence and is adding more brick-and-mortar galleries to its footprint. And the company is growing into other divisions that include luxury travel cruising and lodging, along with architectural and other design services.

It weathered a tumultuous year for brick and mortar stores and aims to continue growing by enticing wealthy clientele to an ever more diversified list of services. Time will tell if the bet ultimately pays off.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.