RH (NYSE:RH) is a luxury furniture and lifestyle business that famously made up part of Warren Buffett’s Berkshire Hathaway portfolio between 2019 and 2023. The stock has struggled significantly over the last year, losing over 35% of its value.
Is RH stock a buy now, or is the business too risky in today’s uncertain market?
Why Has RH Sold Off So Much?
RH’s drop has been connected to two large macroeconomic trends, namely the ongoing uncertainty over the impact of higher tariffs and the weakening of the housing market. Of particular concern has been the decline in the luxury housing market, a key driver of sales for RH.
The rapid increase in tariff rates has been another major problem for the business, forcing it to adjust its sourcing and imposing higher input costs on its imported furniture. The shock of the initial tariffs was added to in late August, when Donald Trump announced that his administration would be rolling out additional tariffs targeted specifically at furniture imports. Though a rate has yet to be announced, the tariff is expected to be imposed sometime within about the next month.
Has RH Deteriorated?
Surprisingly, RH has been delivering fairly solid growth on both its top and bottom lines while its share prices have been collapsing. The business has experienced revenue growth for the last five quarters and earnings growth for the last four. Even as recently as Q2 of this year, RH delivered an 8.4 percent year-over-year increase in net revenues to $899.2 million and a 79 percent increase in GAAP net income to $51.7 million. Free cash flow for the quarter came in $80.7 million.
Although the top brass has revised its full-year guidance downward, the business is still expected to deliver fairly positive overall performance. This year, the leadership team projects revenue growth in the range of 9 to 11 percent with between $250 million and $300 million of free cash flow.
RH has also been proactive in shifting operations to adjust for the new tariff policies it has been forced to reckon with. Q2’s report, for example, detailed a substantial shift away from Chinese sourcing as well as exploration of alternatives to Indian manufacturing.
RH is actively reshoring much of its upholstered furniture business to its domestic production facility in North Carolina. Though the impact of the tariffs remains negative, it seems that the business is making very solid progress in mitigating those effects as best it can.
All told, RH is still performing well in spite of the challenges it faces. Management highlighted this ongoing performance in its Q2 report, illustrating how well RH has been able to execute in the face of one of the weaker housing markets of the past few decades. Though it’s far from impossible that things could still take a turn for the worse, RH’s recent performance and near-term outlook don’t seem to line up particularly well with the drastic downward movements of its share prices.
Is RH Stock Undervalued?
At 1.3 times sales, RH’s P/S ratio is at one of the lower points it has reached in this decade so far. Though RH’s P/E ratio is still elevated at 40.7 times earnings, the premium could be justified by the quality of the business, its long-term prospects for sustained growth and its ongoing success in what have proven to be challenging market conditions.
Turning to analyst forecasts, the consensus price target for RH is $254.12, about 16.3 percent above the most recent price of $218.44. RH currently has a consensus hold rating, though it’s worth noting that five of the 14 analysts covering it still rate it as a buy compared to eight rating it as a hold.
Could Fresh Tailwinds Be Ahead?
Fortunately for RH shareholders, there could be some brighter spots ahead for its macro outlook. Specifically, the Fed’s recent rate cut and future repetitions of it could help to stimulate the housing market. A stronger housing market could be a major boon for RH and many other furniture businesses, as furniture sales tend to pick up alongside home sales.
The Supreme Court is also expected to hear legal arguments against the Trump administration’s signature tariff policy on November 5th. Though there would be other tariff powers available to the executive branch if the court rules against the current set of them, the tariffs going forward could be more limited in scope.
As such, RH might benefit from a favorable court ruling that restricts the executive branch’s ability to impose broad tariffs.
With all of this said, there could also be macroeconomic challenges ahead that could balance out these positive factors. With both the labor market and consumer spending currently weakening, RH may not be out of the woods yet. Though its luxury products appeal to the upper-income consumers who have proven most resilient so far, a generally weaker economy could weigh on RH in the near term if affluent consumers begin delaying purchases.
So, Is RH Stock a Buy?
In the short run, RH faces macroeconomic headwinds that are beyond its control. As a result, it’s entirely possible that the business could see more muted growth, something that has already been made apparent by management’s decision to downgrade its full-year guidance. The uncertainty around tariff policy is also a problem for RH, as the business is still waiting to see what the impacts of the latest round of tariffs could be.
Taking a longer-term view, however, RH remains a successful high-end retail business that is still managing to perform reasonably well in spite of current challenges. While the stock may not be substantially undervalued, it likely is trading in the vicinity of a fair value range that could give investors a decent entry point.
All told, RH could be a decent stock to buy now and hold in hopes of future macroeconomic improvements. Though there could be elevated volatility in the near future, RH may appeal to long-term investors for its potential to produce gradual compounding returns.
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.