Upscale furniture retailer RH (NYSE:RH) has been on a sharp run higher since September when it reported second quarter earnings that beat Wall Street estimates. Shares are up 68% in the last three months and the company formerly known as Restoration Hardware just reported financial results again, sending the stock higher still despite falling short of expectations for the period.
Although it missed top and bottom line forecasts, RH told shareholders it saw demand jump 13% even though we’re in “the worst housing market in 30 years.” In fact, demand, which it defines as the dollar value of orders placed, is accelerating.
November demand rose 24% for the RH brand and is 30% higher in December. That allowed investors to overlook the earnings and revenue miss, and today RH stock sits at its highest level in two years.
While RH has never split its stock, it did announce one back in March 2022, but never followed through. Now that RH stock is trading near those levels again, it might be time for the luxury retailer to make good on the promised split.
24/7 Wall St. Insights:
- Upscale furniture retailer RH (RH) has been a market darling for most of its public existence, though the pandemic hangover caused its stock price to fall sharply.
- Two years ago, RH announced a 3-for-1 stock split, but never followed through, but now might be the time for it to make good on the plan.
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A roller coaster ride from IPO to today
RH was a market darling following its November 2012 initial public offering at $24 per share. The stock doubled in 2013 and rose another 42% the following year. While it had a rough 2016, from its IPO through 2019, the upscale furniture retailer soared 533%, a compound annual growth rate of almost 44%. In comparison, the S&P 500 only rose 126% over those same six years.
Then Covid hit and RH stock went parabolic, more than tripling in value. With consumers flush with cash from stimulus checks, the high-end furniture outlet saw profits surge. The stock topped out at almost $750 a share in 2021, but then things unraveled.
Supply chain issues that struck industries across the spectrum also hit RH hard. Store openings were delayed and it held back on the launch of a new brand and a new catalog. Shares of the retailer lost half their value over the ensuing seven months, which is when RH announced a 3-for-1 stock split.
While admitting a stock split changed nothing about the value of a company, it said there would be numerous benefits, including the “recruitment and retention of talent.” RH expected to effect the stock split sometime in the spring of that year, but it never happened.
The stock tumbled as low as $220 per share that summer before rallying again. Yet it wasn’t until its September earnings report that its shares gained traction once more and now trade at the same level where it had announced the split.
Building back better
But there are other arguments in favor of it following through this time. For one, RH business is arguably stronger than it was two years ago, even in the face of the most challenging housing market in three decades.
It has rebranded itself from a traditional furniture retailer to a luxury lifestyle brand. It focuses on creating experiential retail through galleries, dining, and design services, setting it apart from its peers. Chairman and CEO Gary Friedman explains the cachet that attaches to buying from RH. “‘Hey, I got everything in my house from Wayfair,’ doesn’t really render you more valuable if you’re trying to position yourself higher in the economic societal perception of the world,” he told analysts.
Which is another point in RH’s favor. It caters to a demographic that is less sensitive to economic downturns or housing market fluctuations. These consumers have the financial means to spend on luxury items, viewing RH’s products as investments in quality and design rather than simple discretionary spending.
RH also diversified its revenue streams away from furniture, expanding into areas like hospitality with guesthouses and dining experiences. It is also growing internationally, opening galleries in London and Paris next year, that could tap into new luxury customers less affected by the U.S. housing market’s challenges.
Key takeaway
These factors combined suggest RH has positioned itself in a way that might insulate it from some of the negative effects of a challenging housing market. By focusing on aspects of its business that resonate with high-end consumers regardless of the broader economic environment, conditions might be ripe for a stock split to finally bear fruit.
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