During the initial days of the novel coronavirus pandemic, several analysts claimed that we’ll see a quick V-shaped recovery. But as those days dragged into weeks and later months, much of that optimism faded. However, with the resurgence of companies like RH (NYSE:RH), it appears that this early instinct is correct: just look at the chart of RH stock!
Adding even more encouragement is the fact that RH is a luxury furniture and home furnishings retailer, catering largely to the discretionary whims of the affluent. Of course, when the pandemic first struck the U.S., everyone irrespective of their social class hunkered down. It wasn’t the time to prance around. Thus, the substantial increase in sentiment toward RH stock underscores that the consumer is back.
If that wasn’t enough convincing, consider the U.S. Department of Commerce, which gave bulls more reason to smile. Retail sales jumped nearly 18% in May from a month earlier, greatly exceeding economists’ consensus expectations. Breaking down individual segments, clothing enjoyed the biggest spike, up 188% from April. And furniture sales came in second place, up nearly 90% month-over-month.
Naturally, RH stock got a nice boost following the reveal. However, shares are technically near an overheated range, worrying prospective buyers that they may end up holding the bag. After all, the economy has improved from extremely low comparisons. Substantively, we’re not recovered yet.
Here is the good, bad, and ugly of this luxury retailer.
Why RH Stock Is Gunning Higher
As you might guess, the home furnishing industry does better during times when people are buying homes. To that end, RH stock is getting the best economic data it can due to tremendous mortgage demand. Here’s how CNBC’s Diana Olick describes the bullish environment:
Mortgage applications to purchase a home rose 4% last week from the previous week and were a remarkable 21% higher than one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. That was the ninth consecutive week of gains and the highest volume in more than 11 years.
“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.
Additionally, home buyers jumped on the opportunity of record-low mortgage rates. According to Olick, “The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 3.30% from 3.38%, with points decreasing to 0.29 from 0.30 (including the origination fee) for loans with a 20% down payment.”
Interestingly, demand for adjustable-rate mortgages represented just 2.8% of total applications for the aforementioned period. Prior to the Great Recession, ARMs tempted lesser-financed buyers into purchasing homes they couldn’t afford. Thus, this current home-buying surge appears to have more credibility, bolstering the longer-term case for RH stock.
Don’t Get Too Comfortable
Although retail sales in the furniture and home furnishings sector was dramatic on a month-to-month basis, it’s important to have perspective. You wouldn’t get excited if your million-dollar portfolio shrank to a buck, only to see it rise 900% to $10.
Of course, I’m exaggerating the scale of the coronavirus-fueled devastation. But the point remains. Getting excited over percentage gains detracts from the nominal damage that this crisis inflicted. Plus, the percentage game is a double-edged sword.
For instance, on a year-to-date basis, furniture sales are down nearly 24%. For comparison, sector sales dropped 3.2% from January 2008 to May 2008. This metric fell 3.7% in the year-after period.
Also, note that we’re now back to levels last seen in late 2012. Granted, the bulls will claim that sales will move higher from here on out. However, with weekly jobless claims still numbering in the millions, with a worryingly high level of permanent job losses, this optimistic forecast isn’t guaranteed to pan out.
That should give you pause, especially considering that RH stock is again technically overheated.
The Downright Ugly
There’s a common stereotype that rich people are the stingiest. If you expect them to tip well because of their wealth, think again! The idea is that these well-off folks didn’t get there because of their consumptive behaviors.
Of course, not every rich person falls into this categorization. But according to a recent report from the New York Times, the most affluent folks – defined as being in the top 25% income level – are cutting their spending the most.
This is problematic for a host of reasons. However, journalists Emily Badger and Alicia Parlapiano point out a potentially brewing crisis:
As income inequality has grown in America, so has inequality in consumption. That means that when the rich spend money, they drive more of the economy than they did 50 years ago. And more workers depend on them.
Put another way, this particular economic shock — one that has halted much in-person spending, even by rich people who never lost their jobs — has been devastating for an economy in which many low-wage workers count on high-income people spending money.
In hindsight, you can appreciate the contrarian viewpoint that speculators had toward RH stock. But with shares having exploded higher, we need more substantively positive news to keep momentum running. Unfortunately, the low-hanging fruit has probably been eaten already.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.