Restoration Hardware’s Stock Looks Cheap at Current Valuation

  • Restoration Hardware’s (RH) share price continues to fall, having dropped another 20% so far in May.
  • The decline does not reflect RH’s strong earnings and international growth strategy.
  • With a price-to-earnings ratio of 12.63, RH stock currently looks undervalued and cheap to buy.
Restoration Hardware storefront exterior in North Carolina. RH stock.

Source: CLS Digital Arts / Shutterstock

Can anything stop the slide in shares of home furnishing company Restoration Hardware (NYSE:RH)?

It has been a long, painful descent for RH stock and a bottom does not appear to be in sight for the Corte Madera, California-based company. Since the start of May, Restoration Hardware’s share price has declined 20%, bringing its year-to-date decrease to nearly 50%. At its current price of $279 per share, RH stock is 62% lower than its 52-week high of $744.56 reached in August of last year. While the company continues to report profits and plans to expand its business globally, the stock can’t seem to escape negative investor sentiment.

RH Restoration Hardware $279.45

Moving Beyond Furniture

Restoration Hardware has ambitions to be a lot more than a home furnishing retailer. The company is trying to become what it calls a “luxury brand.” To that end, RH is expanding in both Europe and the U.S., opening new stores that it calls “galleries,” as well as launching new upscale restaurants attached to its stores and moving into hotels through the development of “RH Guesthouses.” The company is even designing a luxury yacht that people can rent out.

Currently, the majority of Restoration Hardware’s sales occur online rather than in physical store locations. But with the pandemic receding, RH now sees an opportunity to take its sales offline and open new physical store locations around the world. The company is opening four new gallery showrooms in the U.S., as well as showrooms in London, England and Paris, France. The first RH Guesthouse is scheduled to open in New York City, followed by a second Guesthouse in Aspen, Colorado that will feature “the first RH bath house and spa.”

Although Restoration Hardware is putting a focus on growing its physical presence, the company is not neglecting its bread-and-butter online sales channel. The company has launched the “World of RH,” a digital portal that provides consumers with comprehensive information about its products, places and various services.

Attractive Valuation

Restoration Hardware’s earnings have been strong over the past year. In 2021, the company’s revenue rose 32% year-over-year to $3.75 billion and its net income increased an impressive 153% to $689 million. However, due to the war in Ukraine and supply chain constraints, RH lowered its guidance for this year’s first quarter, which set off alarms on Wall Street. The company issued conservative guidance for Q1, saying it expects revenue to decline by 7% or 8% from last year. That led many analysts to downgrade RH stock ahead of its next print that is scheduled for Jun. 8.

Despite the conservative guidance, there are still reasons to like RH stock. These include an upcoming 3-for-1 stock split that will make the shares more affordable to retail investors and an extremely attractive valuation following the selloff over the past six months. Restoration Hardware’s price-to-earnings (PE) ratio now stands at 12.63, which is lower than the average of 15 to 17 among stocks listed on the benchmark S&P 500 Index. The current PE ratio suggests that Restoration Hardware’s stock is undervalued at current levels. Among 15 professional analysts who cover RH, the median price target on the stock is currently $510, suggesting 82% upside.

It is also worth noting that famed investor Warren Buffett is an RH shareholder. Buffett’s holding company, Berkshire Hathaway (NYSE:BRK-B), owns 1.8 million shares of RH stock, which is equal to about 8% of the company. Buffett has stood by the company despite the recent selloff in the stock.

Consider a Position in RH Stock

While it’s not without risk in the current climate, there are plenty of reasons for investors to consider taking a position in RH stock. The company’s growth and expansion, upcoming stock split, attractive valuation and decent earnings are all reasons why investors may want to view the current selloff as a buying opportunity. It could be the type of investment that pays off handsomely over the long-term. As such, RH stock is a buy.

On the date of publication, Joel Baglole held a long position in BRK.B. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.  

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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