RH (NYSE: RH), the luxury home furnishings company formerly known as Restoration Hardware, saw its share price initially slip after offering up disappointing revenue guidance. However, a rally followed going into Friday’s trading session, making the stock green on the day. Driving this erratic performance is a combination of factors in its most recent earnings report, most of which will be readily understandable.
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While RH beat earnings-per-share estimates, clocking in EPS of $8.08 vs. estimates of $6.71, and beat revenue estimates by 2.3%, RH’s revenue guidance looks for a slip in revenue for this year’s third quarter. The company looks for a decline in Q3 revenue of 15% to 18%. However, certain projections were only calling for a 10.7% drop.
It’s not surprising to see RH’s revenue figures off a bit, especially given the two biggest factors: the years being compared and the overall environment. I’m standing neutral on the company right now, however. While it’s a sound company overall, it’s a fairly safe bet that its primary stock in trade might see some reduced demand for the next while.
The last 12 months for RH shares featured a slow, steady march downward. This time last year, RH shares were selling for close to $700 per share. That lasted until late September when the company began its slide down to current days, where a share goes for closer to $270.
The company is off its lows of $207 for the year, but it’s also well off its highs.
Is RH a Good Stock to Buy?
Turning to Wall Street, RH has a Moderate Buy consensus rating. That’s based on 10 Buys and four Holds assigned in the past three months. The average RH price target of $315.79 implies 15.4% upside potential.
Analyst price targets range from a low of $224 per share to a high of $420 per share.
Investor Sentiment Proves Increasingly Shaky
While things look reasonably solid for RH from an analyst perspective, things aren’t so great everywhere else. Overall, though, RH could look much worse. RH currently has a Smart Score of 6 out of 10 on TipRanks.
That puts it on the high side of the midpoint and at the second highest level of neutral, making it slightly more likely than not that the company will outperform the broader market.
Not bad, certainly, but the insider perspective leaves a lot to be desired. Insider trading at RH is solidly Sell-weighted, though there are signs that that’s turning around a bit. RH insiders sold $4.9 million worth of shares in the last three months alone. The period of May 2022 to July 2022 shows 10 Sell transactions staged along with nine Buy transactions.
Pulling back to the last 12 months, it was all rather slow until March 2022, when insiders started a much more brutal selling period. From March to July 2022, RH insiders executed 24 Sell transactions but only 10 Buy transactions.
It could be a good sign that buying activity is starting to pick up at the company. It certainly does suggest that the aggregate is interested in owning again rather than selling off. That could be a function of the current share price, which isn’t far off its lows.
A Solid Company with Some Serious Risks
It’s hard not to like RH, at least somewhat. After all, it’s selling home furnishings. When there’s a recession brewing—or already happening, as may be the case right now, depending on who you ask—people tend to stay close to home. However, there are two key problems with that thesis that will ultimately limit RH’s ability to take advantage right now.
The first of these is the comparison period. Remember that the pre-market drop was caused by RH suggesting it wouldn’t match up well against this time last year.
There’s a perfectly good reason for that; remember this time last year. September 2021 was when COVID-19—and the numerous restrictions governments placed in response to that—were largely starting to wane.
People were already buying home furnishings hand over fist. Flush with stimulus cash and unable to spend on much else due to COVID-related closures, people invested heavily in their homes. Since people were largely stuck therein, they spent big on making their homes as nice as possible.
Now, with people pretty much able to go anywhere again—even New York’s public transit system no longer requires masks to ride—they are. And that means less spending on home goods.
Second, there’s the matter of macroeconomics to discuss. As much as people would normally spend more on prettying up the house in a recession, this recession is somewhat different. Marked by rampant inflation, people are spending more at the grocery store and the gas pump.
Gas spending has dropped somewhat in recent days, thanks to multiple factors. Demand destruction from kids returning to school, the move to winter-blend gasoline, and several others are prompting some drop in prices, though we’re still well above prices seen in early 2021.
Grocery prices, however, are still high. Already, some are warning that you should buy a Thanksgiving turkey early due to supply issues, and prices are already climbing.
Take these factors together, and it’s no surprise RH is looking at revenue drops. The pandemic-era buying sprees front-loaded sales. Meanwhile, demand is on the decline thanks to price hikes everywhere else.
However, RH is getting ready for a comeback already, and that’s good news. For instance, the company opened its first “overnight hospitality experience” in New York City. It’s a “hotel-like concept” that shows off just what RH can do with a space, and it’s a clever idea.
Only an inquiry can book a space there. Moreover, those inquiries will only occasionally bear fruit. Much like South Park’s Cartmanland, the limited availability should spark popularity by projecting an aura of exclusiveness.
Conclusion: It’s Just Not a Good Time
Under normal circumstances, RH would probably be a good recessionary buy. It’s well off its highs and is trading much closer to its lowest price targets. The rally shares experienced today proved its resilience surprisingly well.
It deals in home furnishings. The fact that it’s upscale home furnishings actually helps it a bit. Recessions and inflation hit upscale shoppers less hard.
However, with sales front-loaded from the pandemic, and prices on basics on the rise, looking for RH to produce excellent results just doesn’t work. Even the company itself expects to turn in reduced performance, more so than even analysts were looking for.
That’s why I’m neutral on RH. Ordinarily, it would be a good buy, but for right now, it’s got a bit more room to drop than it does grow. That won’t be the case forever, and when things turn around, getting back into RH will likely be a good plan again.
