RH Stock: Recent Pullback Might Be an Opportunity

RH (RH), formerly Restoration Hardware, is a luxury furniture retailer in the United States and Europe. The stock price has dropped over 20% in the last six months and almost 10% in the previous month alone.

On the other hand, the company’s results continue to beat expectations. This disconnect has caused the stock to become undervalued and provides an opportunity for long-term investors, in my opinion.

I am bullish on RH stock. (See Analysts’ Top Stocks on TipRanks)

RH‘s Success and Expansion Plans

RH started as a cash-and-carry (CAC) retailer before switching to a subscription service in 2016. The company also altered the brand to become an exclusive, luxury-oriented name.

Both changes have proved very successful. Because of the luxury model, the company has deep pricing power in the market. It has few actual competitors in its lane, and margins are high. The subscription model has also paid dividends as it has allowed the company to thrive in an e-commerce-dominated marketplace.

In 2022, the company will also make its first forays into Europe, starting with the United Kingdom and France. Due to pandemic concerns, these gallery openings have been put off but appear on track for 2022.

The Omicron variant presents a risk of being pushed back once again. Management believes the international opportunity for RH is massive and seems eager to expand in the coming years.

Q3 Results Beat Estimates

In Q3, RH beat estimated revenue by $18 million and posted a total top-line figure of $1 billion. Non-GAAP earnings-per-share (EPS) was $7.03, and GAAP EPS came in at $5.88. RH also raised guidance for the full fiscal year to reach 32%-33% growth.

RH has posted stellar growth numbers, despite headwinds from the COVID-19 pandemic. Its Q3 2021 revenue of $1 billion bested the same period in 2020 and 2019 by 19% and 49%, respectively. This amounts to a 22% compound annual growth rate amid supply-chain slowdowns and other macroeconomic challenges.

Even better, gross profit increased more than revenue gains. This means that the increase in revenue is not simply the result of higher prices but rather organic growth in the business. Gross profit for Q3 2021 was 24% higher than over the same period in 2020.

The other impressive results are seen by examining the margins, which have been on a steady climb in recent years. In Q3 2019, the gross margin reached 42%. It then climbed to 48% in Q3 2020 and was an impressive 50% in Q3 2021.

The same pattern holds for operating margin, which was 27.1% in Q3 2021, up from the 26.7% posted in Q3 2020 and far outpacing the 13% from Q3 2019.

RH has posted $21.48 in earnings per share (EPS) over the prior twelve months. This gives the company a reasonable price-to-earnings (P/E) ratio of 25.5, which drops to around 21 on a forward basis. Recent market weakness has seen the P/E drop below where it traded for the majority of 2019. This creates an opportunity for investors who wish to accumulate shares in RH.

Wall Street’s Take

Turning to Wall Street, analysts are incredibly bullish on RH stock. The company receives a Strong Buy consensus rating based on seven Buys assigned in the past three months. The average RH price target of $771.29 implies 40.9% upside potential.

Final Thoughts

RH continues to outperform expectations even with headwinds lingering. COVID-19 has impacted results through supply-chain challenges and rising costs, yet RH continues to expand margins and grow revenues at an impressive clip. The stock has been caught up in the general market downswing and trades at a discount to historical ratios as a result. For long-term investors, I think this represents a terrific opportunity to consider RH.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.