The pandemic-laden year that is 2020 will be remembered as one that accelerated technological shifts such as e-commerce, working from home, and cord-cutting. While investors' minds are fixated on high-flying tech stocks with outrageous valuations, RH (NYSE: RH), the high-end furniture supplier formerly known as Restoration Hardware, is up 79% this year.
You would think a company with the stamp of approval from Warren Buffett's Berkshire Hathaway would be the talk of Wall Street, but it isn't. In addition to being a mid-cap stock, there are a couple reasons I believe RH goes under the radar.
Selling furniture is boring
Few things make people yawn more than having to buy furniture, but this is RH's bread and butter. The company sells home furnishings, including furniture, lighting, textiles, and outdoor and garden products. I know this doesn't get the heart racing as much as videoconferencing or connected home fitness equipment does, but the numbers last quarter were impressive.
Image source: Getty Images.
In the second quarter of 2020, RH achieved a record adjusted operating margin of 21.8% on revenue of $709.3 million. This kind of margin from a furniture shop is jaw dropping, and instead resembles metrics a luxury designer might have. LVMH Moet Hennessy Louis Vuitton, the French fashion house, had an operating margin of 21.4% in 2019.
RH Chairman and CEO Gary Friedman wants the company to do more than sell furniture. He sees RH as a $20 billion global luxury and lifestyle brand that will eventually attack the larger hospitality and housing industries. The recent success of RH, coupled with the fact that it is still very early in its growth trajectory, should warrant much more chatter.
Transforming a boring, commoditized business like furniture merchandising into a high-margin, differentiated, lifestyle brand is exciting, as RH's stock performance year to date shows.
Isn't retail dead?
Another key reason RH isn't being talked about much is because it's in the retail sector. While the financial media (rightfully) focuses on the countless closures happening this year, core to RH's growth strategy is to open more locations. Its Design Galleries, which average 33,000 square feet in size, are necessary for RH to "climb the luxury mountain," as Friedman says. He dislikes a digital-only strategy, and believes that RH's desire to sell entire collections instead of individual pieces of furniture requires an immersive, in-person experience that can't happen solely online.
Friedman emphasized this point in the Q2 shareholder letter: "In our industry, even digital native brands, the ones who have made it, have all done so by opening retail stores. Retailers who claim they make more money online than they do in their retail stores are most likely not allocating their costs by channel correctly, and to the ones who believe that their website traffic would not be negatively impacted if they closed their stores, well good luck with that strategy."
As it continues to be overshadowed by the ongoing retail apocalypse, RH will keep going against conventional wisdom and expanding its physical footprint.
These are the best opportunities
The biggest winners for stock market investors oftentimes are the companies that were purchased when no one paid attention to them. RH's stock has outperformed the market since its IPO in 2012, and yet it still flies under the radar primarily because of the industry it operates in. Management has ambitious plans to build a vast international brand. Investors need to buy the stock now before it's too late.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends RH and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.