3 Reasons RH Is a Great Retail Pick

RH (NYSE:RH) has been one of the few brick-and-mortar retailers to execute a successful turnaround plan and could be one of your best bets in the industry right now. Formerly Restoration Hardware, the upscale furniture store has a lot going for itself right now and buying RH stock now could pay off in a big way over the next few months.

Here’s a look at three reasons RH stock is poised to pop over the next few months.

Friedman Has Incentive

Of course, theoretically every CEO at every company has incentive for turning in a strong performance for investors. However, in RH CEO Gary Friedman’s case, that incentive is even stronger. InvestorPlace contributor Lawrence Meyers pointed out a huge potential catalyst for RH stock — Friedman’s stock compensation package.

The board at RH granted him a package in which he receives 1,000,000 shares of RH stock at $50 per share. Those shares vest when the stock gets to $100, $125 and $150 — which translates to a $100 million payday for Friedman for the next five years.

So, regardless of what’s going on at RH, you can be pretty confident that Friedman is going to do everything in his power to get the stock above $150 before May 2018 in order to make the most of this package.

That’s great news for investors, because with the stock trading at $103.87 there’s a potential $50 upside over the next six months.

RH Stock Earnings

Of course, if the same package was awarded to say, J C Penney Company Inc. (NYSE:JCP) CEO Marvin Ellison, I might not be so optimistic. But RH is actually looking pretty solid from a financial standpoint. The company’s most recent earnings release showed that RH continued to churn out solid growth despite the challenging industry conditions.

The company’s third-quarter results showed an 8% rise in sales, impressive considering that hurricanes Harvey and Irma reportedly left a 1% dent in the firm’s sales figures.

Outside of the hurricane pains, everything looks pretty good for RH- the company benefited from a lower effective tax rate, margins improved and the number of returns, exchanges and canceled orders deceased.

Avoiding Retail Pitfalls

The reason RH’s earnings were so positive is that the firm has successfully avoided some of the pitfalls of its peers. While many companies tried to expand their store footprint in order to capitalize on improving store traffic, RH instead invested in making its existing galleries better. During the third quarter earnings call, Friedman commented that the firm’s new design galleries are committed to creating unforgettable customer experiences — so much so that the company has seen 32 marriage proposals in its Chicago location.

That’s essential for retailers with physical locations in this day and age. With online shopping growing and the number of brick-and-mortar retailers shrinking significantly, it’s important for retailers to focus on customer experience in order to drive store traffic. It’s not enough to compete on price or unique offerings anymore — you have to give people a reason to set foot in your location, and RH is doing just that.

However the most impressive thing RH has done has been shifting its entire business model to mimic that of membership-based retailers like Costco Wholesale Corporation (NASDAQ:COST), but on a higher-end scale. More than 90% of RH’s business comes from its members — an impressive feat considering it has been less than 2 years since the firm began transitioning its business model.

Moving forward, the firm is looking to build out its delivery options — something that could continue to add value to RH membership holders. Friedman also mentioned that there is a gap in the logistics space for a high-end delivery service and he’s hoping to fill it.

The Bottom Line

RH stock has the potential to make some pretty impressive gains over the next six months, and it’s worth considering if you want to add a retailer to your portfolio. If you’re hoping to make some money on RH stock in the next few months, you’ve got a powerful ally in Friedman who has even more incentive than you to drive the share price higher.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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