Despite their best efforts, not every company has managed to put the novel coronavirus in the rearview mirror. RH (NYSE:RH) is one of the lucky ones, moving on to bigger and better things. In fact, RH stock has managed to regain all of its losses from Covid-19.
Now the home furniture retailer is making a bold move. In an economy set to struggle for the next year or two, RH is doubling down in the luxury goods space.
The company is taking a page out of Bernard Arnault’s book. Arnault, the chairman and CEO of LVMH (OTCMKTS:LVMHF), famously said of luxury goods, “It is the only area in which it is possible to make luxury margins.”
Can RH become well known as a luxury brands business? I’m betting that it can.
RH Stock at a Glance
First, let’s take a look at the numbers.
RH stock is trading above $250 per share and again challenging all-time highs. Its chart these days shows a classic V pattern. What does this mean? Well, the stock lost more than 65% of its value from February into early March, then quickly made up all those losses.
If only the U.S. economy could recover as quickly as RH stock!
First-quarter earnings for the company showed revenue of $482.9 million, which was below analysts’ estimates of $563.06 million. Earnings per share also disappointed, showing $1.27 versus estimates of $1.55.
CEO Gary Friedman said the company was forced to improvise as it battled through the downturn. The pandemic shuttered warehouses and forced many retailers to go to an online-only business model.
“The power of our multi-channel platform, plus the strength of our membership model enabled us to engage with our customers virtually and not chase demand through promotions, while continuing to elevate and enhance the RH brand,” he said.
The company didn’t issue an outlook for the rest of the year but said it expected a strong rebound in the second quarter. That’s a reasonable expectation, considering the retail reopening underway.
Financial services firm Cowen says business demand for Restoration Hardware grew 7% in May on a year-over-year basis, and was up 11% in early June.
The Shift to a Luxury Ecosystem
It would be pretty easy for Restoration Hardware to maintain the status quo. But the most successful companies embrace bold leadership and vision.
And in his annual letter to shareholders, that’s exactly what Friedman is offering.
He evokes Arnault’s endorsement of luxury margins while detailing a grand plan to develop products, services and spaces that he says will “elevate and establish the RH brand as a global thought leader, taste, and placemaker.”
In doing so, Friedman envisions building on the company’s Galleries that the company began a decade ago. He wants to launch new locations that include dining and hospitality services. Hopefully, these locations would help bring in customers more often.
The company would also create RH Guesthouses as a way to get into the luxury resort business, and RH Residences that would include fully furnished turnkey homes and condos.
The company’s different divisions would all help create what Friedman calls an ecosystem of complementary goods. This ecosystem would then circle back to the company’s Galleries.
In all, this shift would be massive. It would expand RH, giving it a significant digital presence. And it would take it from a $6-billion business with a U.S. focus to a $20-billion business that operates around the globe.
The Bottom Line on Restoration Hardware
Like me, there are plenty of analysts who have a positive view of RH stock. Tom Forte of D.A. Davidson says RH is benefiting from the “nesting” phenomenon as consumers work from home.
And Andrew Left of Citron Research says RH is a “clear winner” of a growing trend. Some U.S. workers may choose to relocate outside of urban centers. This trend is potentially large in scale, and RH stock would clearly benefit.
“Regardless of the possibility of a vaccine, the trend of moving out of cities to the suburbs for larger living spaces where people can work from home and the home is a sanctuary will be long-lasting,” Left said.
I’m in agreement. Restoration Hardware may not become a $20-billion business, and it will take some time to build out the ecosystem that Friedman envisions. But the company’s growth plan in the post-coronavirus economy is a solid one.
RH stock is a strong buy and has an A grade right now in my Portfolio Grader.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.