The bear market of 2022 is quickly becoming a distant memory.
Sparked by the launch of ChatGPT and the generative AI boom, the S&P 500 has rallied to all-time highs, setting a new record in January and pushing to new heights since then.
However, some stocks have been left behind. The housing sector, in particular, has struggled as existing home sales have plunged, and businesses that depend on housing transactions have suffered as well. That includes home furnishings stocks and one that's still down sharply is RH (NYSE: RH), the high-end retailer formerly known as Restoration Hardware. The stock is 66% down from its high of 2021.
Like most of its peers, RH's shares soared during the pandemic, driven by second-home purchases and the nesting effect of the stay-at-home period, leading Americans to spend more money on home improvement and decorating.
However, since then, sales and profits have fallen as high mortgage rates have scared off homebuyers, and consumer spending has shifted back to services like travel and restaurants.
RH is still struggling in the current environment. Revenue fell 4% to $738 million in the quarter ended Feb. 3, 2024, and gross margin fell sharply as well, declining 430 basis points to 43.5%. Among the challenges the company faced in the quarter were disruptions in the Red Sea shipping channel, which slashed revenue by $40 million, and costs rose as the company invested in a new product assortment to prepare for a recovery in 2024.
Image source: RH.
Is RH turning the corner?
It might be premature to say that RH is turning the corner. The housing market remains weak, and interest rates are still at their highest levels in nearly 20 years.
However, the company has refreshed its assortment of products and launched a new outdoor sourcebook (catalog), which it expects to lead to significant gains in market share in 2024. It's also opening several new galleries, betting on the brick-and-mortar channel at a time when many of its competitors are pulling back from it.
In its outlook, the company said it expects "business conditions to remain challenging until interest rates ease and the housing market begins to rebound," but it expects demand trends to accelerate through the year due to investments in product and brand and easier comparisons.
For 2024, the company sees revenue increasing 8%-10% on a comparable basis, and expects demand growth, a proxy for orders, rising 12%-14%. The gap is due to an order backlog and a change in its assortment.
It also called for an adjusted operating margin of 13%-14%, compared to 13% in 2023.
Why RH stock is a buy
In addition to the expected return to growth in its business and the longer-term recovery in the housing market, RH also looks like a buy because management has aggressively repurchased stock during the downturn, a move it has used to its advantage in challenging times it's faced earlier.
Over the last year, it has reduced shares outstanding by 22%, meaning that its profits will be worth 28% more on a per-share basis.
Additionally, CEO Gary Friedman has proven himself as a visionary in the industry, and the business has overcome challenges before. The stock plunged in 2016 as the company pivoted to a membership model, initially causing revenue growth to stall and profits to tumble. But that proved to be a winning strategy and the stock later soared to new records.
Now, Friedman and RH are embarking on an aggressive expansion in Europe, and tapping into businesses like hotels and restaurants with its new guesthouses, jet and yacht charters, a soon-to-come streaming service focused on architecture and design, and fully furnished turnkey luxury homes.
It's a bold vision, and the stock could be a big winner if it plays out as Friedman sees it.
Given the cyclical downturn in the housing market and the discount in the stock, now looks like a great time to take advantage of the sell-off and scoop up some RH stock.
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Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
