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4 Things to Consider Before Buying Restoration Hardware Stock

Restoration Hardware stock has a rosy future, but its debt obligations make it extremely unattractive

Retail Stocks to Buy for the Long Run: Restoration Hardware (RH)

Source: Shutterstock

High-end furniture retailer Restoration Hardware Holdings (NYSE:RH) appears to have found a winning formula that has helped Restoration Hardware stock make its way nearly $100 higher since last summer. This is all the more impressive given the brick and mortar retail environment.

After all, it’s a dog-eat-dog world out there for retailers and the rise of ecommerce has made it even harder for brick-and-mortar stores to maintain a competitive advantage without cannibalizing their own in-store sales.

The furniture chain’s impressive run has given investors reason to pay attention to Restoration Hardware stock, but many are questioning whether it’s still a worthwhile investment. Here’s a look at the pros and cons for Restoration Hardware.

Pro: Friedman’s Confidence

Restoration Hardware CEO Gary Friedman bought up some 32,000 RH shares back in 2016 when the stock was trading down near $27. Then in 2017 he made a three more big-time share purchases, despite the fact that he had nearly quadrupled his money at that point.

However, as fellow InvestorPlace contributor Bret Kenwell pointed out, Friedman clearly saw that the firm had more good times ahead. While the stock certainly isn’t cheap with a forward P/E of 21.6, Kenwell says that might not be a bad thing. EPS estimates see growth of 119% this year and 13% the following year and sales are seen rising 4.6%  and 8% in 2018 and 2019 respectively.

Should you follow in Friedman’s footsteps? Now that the share price is up to $144, you might want to wait for a pullback to the low 100’s, but Friedman’s confidence is a good reason to keep the stock on your radar.

Con: No Moat

A big reason investors should skeptical about Restoration Hardware stock is the fact that the company doesn’t have much of a moat which could become a problem as competition in the furniture retail space heats up.

Restoration Hardware has found success in its large-store format that allows customers to see and feel their furniture, but also allows them to customize it online. However, that’s not a hard strategy to copy.

Plus, high-end discount retailers are having a moment in the sun right now, which could start to eat into Restoration Hardware’s marketshare.

Not to mention the plethora of big-box retailers and online competitors, like Inc. (NASDAQ:AMZN) and Wayfair Inc. (NYSE:W), that are threatening to pull customers away from Restoration Hardware with lower prices and added convenience. 

Pro: Improving Business

However, so far Restoration Hardware appears to be doing just fine. The firm’s most recent earnings report showed that its omnichannel strategy has been successful so far, with online sales complimenting rather than cannibalizing in-store sales.

On top of that the firm has been able to turn in impressive margins as it’s new strategy hasn’t upped expenses as much as many were expecting.

That’s a big deal in the retail space because finding a way to get customers to shop online without losing the appeal of a physical location has been a major challenge for traditional retailers trying to fend of Amazon’s advances.

However, Restoration Hardware has created a shopping experience that people are willing to travel for, and that’s a huge accomplishment in today’s retail landscape.

Con: Debt

Perhaps the most worrying thing about Restoration Hardware stock is the company’s massive debt pile. The company is carrying around $1.17 billion worth of long-term debt which translates into an unheard of debt to equity ratio of 13,499%.

That’s a scary figure on its own, but when you compare it to the rest of the industry where debt to equity ratios tend to be below 50%, it’s even more concerning.

Restoration Hardware has been relying heavily on debt in order to buy back shares and transition its business. Although right now that strategy is working, the other shoe could drop at any point.

A housing crisis or pullback in the economy would be problematic for furniture retailers in general, but RH would especially feel the pain with such a large debt obligation hanging over it.

The Bottom Line pm Restoration Hardware Stock

Restoration Hardware has a lot going for itself and future predictions for the company look rosy, but the company’s enormous debt obligation is enough to make me steer clear.

It’s important to keep in mind that RH is operating in the retail space- where fickle consumers and a constantly changing landscape have made it difficult for even the strongest to survive. So getting on board with a retailer that is already balancing such a heavy debt obligation is simply too risky. 

As of this writing, Laura Hoy was long AMZN. 

Article printed from InvestorPlace Media,

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