Where Will RH Stock Be In Next 10 Years?

A clue to investors as to what stocks will outperform over the long-term was provided by the Oracle of Omaha when he declared that a business which delights its customers will never go out of business.

Another way of saying that is if a firm provides amazing consumer experiences it can build a loyal following. It’s that concept which has revolutionized RH.

The company transformed from a high-end retail store to a luxury experience brand, and the success it enjoyed sparked a furious stock rally, but the sentiment has cooled, and now the question is what’s next for RH?

Why Is Restoration Hardware Stock Going Down?

RH, formerly known as Restoration Hardware, has had a tumultuous share price ride from sub-$100 per share in 2020 to $720+ a year later. More recently, RH has been trading at less than half that level, so what gives, why is RH stock going down?

The simple answer is that year-over-year sales have declined for 4 quarters straight as the luxury housing market to which RH is directly connected has struggled in the higher interest rate environment.

The July 2022 quarter was the first sign that a slowdown was in the offing. Having enjoyed 7 prior quarters of double digit percentage year-over-year revenue growth, sales hit a brick wall, and grew by just 0.3%. The tide quickly turned and went out for RH, leading to YoY revenue declines in the last four quarters of 13.6%, 14.4%, 22.8%, and 19.3%.

Perhaps what’s most interesting about the sales declines is that they were preceded by a crumbling share price almost a year earlier. RH share price topped in August of 2021 when management had just reported sales growth of 39.4% to $988.9 million.

It wasn’t until March of 2022 when the Federal Reserve started to hike rates, so clearly RH shareholders were discounting what was to come, and they were right. Higher interest rates hurt the housing market and in turn RH sales to luxury homes.

Now that the share price has fallen back to earth, the question is what’s next for RH?

What Is The Prediction for RH Stock?

According to the 17 analysts covering RH, fair value sits at $349.12 per share. The most pessimistic analyst has a $237 target while the most optimistic analyst put a $450 target on RH share price.

It’s no surprise to see a bearish estimate given that sales have been declining at an accelerating rate over the past fiscal year. In addition, no signs appear on the horizon that interest rates will be cut to support the high-end housing market to which RH enjoys exposure.

Perhaps more interestingly is the question of why one analyst put such a high price target of $450 on RH. For that we took a closer look at management’s outlook – they are optimistic that the final quarter of the year will result in a boost to top line revenues.

Should that mark the end of the sales declines, expect shareholders to jump back into RH and, perhaps, buy well ahead of the evidence that sales are improving.

Where Will RH Stock Be In 10 Years?

According to Wall Street analysts, the highest price RH will be in 10 years is $450, which would correspond to a market capitalization of $7.8 billion.

Our own discounted cash flow forecast model suggests the highest price would be $421 per share, approximately $100 higher than where the current RH share price.

One thing that shareholders have to be somewhat cautious about is the current state of the RH balance sheet, which has $417 million of cash but a comparably monstrous debt burden of $3.7 billion.

These balance sheet concerns might have been enough for Warren Buffett to exit his position, which he did in May of 2023 after boosting his shareholding in June of 2022.

A fortress balance sheet is of paramount importance in a challenging economy, and RH appears to have a significantly weaker one versus even Q1 of 2023.

So are shareholders selling, or going short?

What Is The Short Interest Rate for RH Stock?

Approximately 3 million shares of RH have been sold short, corresponding to 20.1% of the float and 16.3% of all shares outstanding. That’s quite a large percentage relative to a company that the market is generally bullish on, such as Apple, where just 0.57% of shares outstanding have been shorted.

From the short interest levels, we can discern that not only have long investors sold over the past year but active hedge funds have decided to take a bearish stance too.

One possible reason for that, and arguably it’s a reason for Berkshire Hathaway offloading its holding too, is that if interest rates remain persistently high then a rebound in RH share price is unlikely in the short to medium-term.

Of course, economic cycles generally have a frequency to them whereby for 5-7 years an upswing occurs and for 1-2 years a downswing.

So, even if RH shares struggle to climb in the next year or two, the longer term prospects for it are positive. The odds are within ten years, RH will return to its former highs, and then some, validating the optimistic price target of $450 per share.

Wrap-Up

RH has suffered from a rising interest rate environment that has hurt consumer demand for its products that are tied directly to the luxury housing market.

A negative omen for the stock is that Warren Buffett’s Berkshire Hathaway sold its shares a couple of quarters ago. Likely, he and his investment team are expecting Federal Reserve interest rates to remain elevated for longer.

Irrespective of those medium term concerns, the long-term prospects for RH are promising. The company figured out how to create top notch experiences among its customer base instead of simply transacting in furniture sales. As a result, brand loyalty has increased and the company is poised to bounce back when the economic tides turn in its favor.

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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.