What’s Driving Upswing in RH’s Stock?

Note: RH fiscal year ends in February’s first week.

RH stock, is an upscale home furnishings retailer, which was formerly known as Restoration Hardware Holdings Inc. The company’s stock currently trades near $415  per share (Dec 18), up around 87% in the last six months. In comparison, the S&P index has been up 10% over the same period. So what is happening with RH stock?

For the third quarter ended November 2, the retailer reported earnings of $2.48 per share on revenue of $811.7 million, falling short of consensus estimates of $2.65 per share and $812 million, respectively. Despite missing Q3 earnings expectations, the luxury home furnishings retailer has seen growth in its core business, driven by new collections, higher contract revenue, and increased hospitality revenue, due to new Gallery openings. Additionally, RH’s Q3 revenue grew 8% year-over-year (y-o-y), with adjusted operating margin doubling to 15% and adjusted EBITDA margin expanding to 21% (from 12% in the prior year) in Q3. The company’s optimistic Q4 outlook, with anticipated revenue growth of 18-20%, has also contributed to the stock’s upswing. For the full year 2024, RH now expects total demand growth of 9.9% to 10.4% and revenue growth of 6.8% to 7.2% y-o-y. It also expects an adjusted operating margin of 11.5% to 11.7% and an adjusted EBITDA margin of 17.2% to 17.4%. That said, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

RH generates revenue through its comprehensive and curated catalogs to drive both in-person and online sales. It offers merchandise assortments across several categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child, and teen furnishings.

The demand for luxury home furnishings declined since the reopening of the economy after the peak of the pandemic. RH experienced a huge demand burst in FY 2020 but experienced significant changes in business from fiscal 2021 through fiscal 2023, largely due to substantially higher interest and mortgage rates, high inflation, and the slowdown in the housing market. Notably, RH stock has performed worse than the broader market in each of the last 3 years. Returns for the stock were 20% in 2021, -50% in 2022, and 9% in 2023.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

[1] Returns as of 12/18/2024
[2] Cumulative total returns since the end of 2016

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