Down 59% From Its Pre-Inflation Shock High, With The S&P Up 6%, What Is Next For RH Stock?

[Note: RH’s fiscal year 2023 ended January 28, 2023]

RH stock, is an upscale home furnishings retailer, which was formerly known as Restoration Hardware Holdings Inc. The company’s stock currently trades at $306 per share, around 59% below its level of $739 seen on August 12, 2021 (pre-inflation shock high), and has the potential for gains. The premium home goods and decor brand experienced a huge demand burst in 2020 and 2021, but it has not been sustained since the last year and a half as customer demand waned during this time. In the recent Q3, RH reported a drop in sales of about 14% year-over-year (y-o-y) and an adjusted loss on the bottom line. The company mentioned the rise in interest rates led to most existing homeowners with low enough mortgage rates not wanting to move.

RH generates revenue through its comprehensive and curated catalogs to drive both in-person and online sales. As a luxury lifestyle brand, it plans to expand ambitiously over the next decade. In addition to expanding into other areas like hospitality through RH Guesthouses and RH Residences, RH has also ventured into the content sphere via RH Media. However, these are relatively new initiatives and are intended more to enhance the brand’s luxury lifestyle offerings than to generate significant revenue, compared to their core home furnishings business.

RH stock has suffered a sharp decline of 30% from levels of $450 in early January 2021 to current levels now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. Notably, RH stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 20% in 2021, -50% in 2022, and 19% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that RH underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could RH face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that RH will have to gain about 141% from here. While it has the potential to recover to those levels, we estimate RH’s Valuation to be around $285 per share, almost 7% lower than the current market price. Our detailed analysis of RH’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how RH stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

RH and S&P 500 Performance During 2007-08 Crisis

RH stock remained flat at $31 from October 2007 (pre-crisis peak) to March 2009 (as the markets bottomed out), implying that RH stock did not lose any pre-crisis value. It rose from the 2008 crisis to levels of around $33 in early 2010, rising roughly 7% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of $1,540 in September 2007 to $757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of $1,124.

RH Fundamentals Over Recent Years

RH revenues grew 46% from around $2.6 billion in FY 2020 to about $3.8 billion in FY 2022, due to the impact of Covid-19. However, sales fell slightly to $3.6 billion in FY 2023 due to softer industry trends. The premium home goods and decor brand saw a huge burst of demand in 2020 and 2021 that was not sustained over the past year and a half. Earnings per share grew from around $11.55 in FY 2020 to $32.37 in FY 2022 but fell to $22.47 in FY23. The reason for this decline was inflation curbing consumer spending and a tougher macro environment across the luxury home furnishings sector.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe RH stock has the potential for strong gains once fears of a potential recession are allayed.

It is helpful to see how its peers stack up. RH Peers shows how RH stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 12/18/2023
[2] Cumulative total returns since the end of 2016