RH Stock: What’s Driving the Recent Rally?

To build a successful business is no mean feat, but forging an upscale luxury label is an art form in itself.

Unlike any other value or quality product enterprise – which competes primarily on price or functionality – luxury brands must cultivate an aura of exclusivity and prestige. Not only do they have to provide the actual goods, but they also have to foment the interactions that strike a chord with a perceptive clientele.

This demands a profound understanding of the target market, a dedication to artistry and excellence, and the capability to narrate a gripping brand narrative. It’s a subtle juggling act, and very few companies succeed.

That said, one enterprise that has managed to skillfully navigate this complex landscape is RH, formerly known as Restoration Hardware.

In fact, RH has successfully established a distinct specialty in the opulent residential decor market, evolving from a cash-and-carry merchant into a provider of sophisticated home furnishings and encounters.

The company’s galleries – which look more like artistic exhibits than conventional stores – have revolutionized the notion of retail space. Its meticulously curated Source Books, which serve as physical extensions of the brand, have elevated the humble catalog into a form of storytelling.

But RH is not satisfied to rest on its laurels. By blending innovation, global growth, and an unwavering dedication to customer satisfaction, it is committed to redefining the essence of a luxury brand in the modern era.

However, despite executing well on its organizational blueprint, the outfit has yet to see the supposed upside reflected in its most recent financial disclosures; the firm’s adjusted net revenues decreased by 29% annually to just $739 million in the first quarter of 2023, while its operating margin buckled 980 basis points to 14.9% over the same period.

Strangely enough, although the company’s GAAP diluted EPS saw a dramatic fall from $7.22 to $1.76, its profitability metrics continued in good form. RH’s trailing twelve-month EBITDA ratio of 21.7% easily beats the Consumer Discretionary median of 10.9%, and its return on common equity of 33.9% is simply impeccable.

Because of these apparent ambiguities, we will delve into the corporation’s journey, exploring its uncommon business model, future prospects, and the risks and opportunities ahead.

Dominating the Luxury Segment

Having successfully carved out a unique niche in the luxury market, RH has effectively transcended the traditional boundaries of the furnishings industry. The company’s strategy isn’t just to sell commoditized furniture but to construct an ecosystem brimming with sought-after products and experiences in an arena where no competitor currently rules.

Indeed, the firm’s leadership sees an opportunity to carve out its own path on a worldwide scale, evolving into a curator of lifestyles attractive to high-net-worth individuals. Unlike other retailers who have minimized their physical presence to focus on e-commerce, RH has increased its footprint with grand design galleries that serve as architectural marvels and a form of passive marketing.

Moreover, the company’s commercial strategies include the publication of Source Books, as well as a membership model that offers discounts and complimentary interior design services for a small annual fee of $175.

In fact, it aims to create a seamless constellation of locations and services by extending its reach beyond furniture with the RH Guesthouse, the forthcoming RH Bath and other collections timetabled to launch over the coming decade.

Its long-term strategy also includes building the world’s first consumer-facing architecture and landscape services platform, with plans to launch RH Residences, featuring fully equipped high-end residences, condos, and apartments with integrated amenities.

For customers, RH’s complete approach materializes digitally through The World of RH, a virtual gateway where visitors can delve into and find inspiration in the profound and extensive nature of the brand. The company’s expertise as a tastemaker will be even more enhanced with the introduction of RH Media, a content hub that will honor the most inventive and influential pioneers who are molding the realm of architecture and design.

RH’s diverse spectrum of places and spaces enlivens customers’ imagination, empowering them to conceptualize and inhabit a meticulously curated universe fostering an emotional bond unparalleled by any other brand worldwide. The company’s ambitions to broaden the RH network amplify the market potential to a staggering $7 to $10 trillion, positioning it as one of the most substantial and invaluable entities among any label today.

Lease Costs & Inventory Levels Rise

In line with its unusual expansion narrative, RH recently unveiled its first international store location in England, UK. The premise will be set in an estate spanning 73 acres, boasting three restaurants, a wine lounge, tea salon, and more than 60 exhibition rooms.

However, this project is burdened with expensive leases and no guarantee of success, and the company’s goal to roll out other galleries in Europe and Australia over the next few years carries with it its own unknown hazards.

There are other challenges, too. For instance, inventory risks are a significant concern for any company that maintains a stock of goods, and RH is no exception. Worryingly, the firm’s inventory levels have risen, with the business having to forecast “increased markdowns” to eliminate its discontinued offerings over the coming quarters.

Is RH A Buy?

Although RH is way off its 2021 highs, the company has witnessed a share price rally of late. Having dropped to around $230 in April this year, investors have driven the stock to above $370, a level not seen since the early months of 2022.

But the firm’s valuation comes with a heavy premium. Its non-GAAP price-to-earnings ratio stands at a nosebleed-inducing 37.4, while its sales multiple is no better at 2.38.

Regardless, RH has a long-term view of the business, and Gary Friedman, the company’s CEO, is both a risk-taker and a visionary. The odds are, with its unparalleled approach to branding and global upsizing, the operation can maintain and grow its strong position in the luxury segment.

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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.