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Did RH’s Stock Price Get Ahead of Its Story?

By Motley Fool Staff – Sep 7, 2018 at 9:13AM

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The former Restoration Hardware had a mixed report for Q2, and while guidance looked good, shares fell.

In this segment from the MarketFoolery podcast, Motley Fool Asset Management's Bill Barker has the unusual opportunity to force host Chris Hill to admit he was flat wrong. Awhile back, when upscale furniture retailer RH (RH -1.31%) made a new loyalty program one of the centerpieces of its recovery plan, Hill found it utterly risible. The joke's on him: The shift to a membership model, improved cost controls, and a well-executed e-commerce plan have turned the company around, and the shares are way up.

So far up, in fact, that perhaps investors realized that they'd gotten a bit overzealous when they looked at Wednesday's numbers. The Fools talk about what has powered RH's rebound, the excellent excuse for its miss on revenues, why it doesn't need to close many stores as it boosts its emphasis on the online channel, and more.

A full transcript follows the video.

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This video was recorded on Sept. 5, 2018.

Chris Hill: Let's move on to some earnings from Restoration Hardware, which, I must have missed this, is no longer Restoration Hardware, it is formally RH. We'll get to the name change in a moment. Just bear with me as I stick with Restoration Hardware. The second quarter report was kind of mixed. Their guidance for the rest of the fiscal year looked good. But I'm wondering if the fact that shares being down about 10% today are more to do with the fact that this stock has had a phenomenal 12-month run. Even with the drop today, this thing has more than doubled over the past year.

Bill Barker: Yeah, I think that is correct. It is a product of the stock getting ahead of the story, as good as the story has been, in terms of the company succeeding at transitioning into this membership model and doing a good job rationalizing costs and not being in the same position as so many other retailers, of needing to catch up online and start closing down stores. They don't have that many stores to close down. They've only got about 65, I think. I think they're more, maybe, in this area than a lot of other parts of the country, because it was surprising to me how few stores there are. To backtrack on one point, we spent like half a show talking about how it was called RH instead of Restoration Hardware.

Hill: We did?

Barker: Yeah.

Hill: OK. I'm clearly old and I haven't drunk as much coffee as you. This one doesn't make as much sense to me as even Coach changing to Tapestry. That makes more sense to me than this.

Barker: Really?

Hill: Yeah.

Barker: They don't sell hardware.

Hill: Yeah, but...I don't know.

Barker: I mean, the name made no sense. Now it continues to make no sense, but it's not misleading. RH. It could be any letters. That doesn't tell you what the store does. But at least it doesn't mislead you the way Restoration Hardware did.

Hill: Yeah, but even when the business of Restoration Hardware was not doing as well as it appears to be doing right now, at least the name evoked a certain type of brand. You understood, "Yes, it's not Ace Hardware. I'm not going there to get a box of nails." But at least you understood what it actually did. Now, RH, it could be anything. It could be a law firm, it could be a sandwich shop.

Barker: I think you have to admit that you have picked this one wrong all the way. You initiated coverage of the business model with a strong sell.

Hill: The loyalty program. I was 100% wrong about the loyalty program when they unveiled that a few years ago. I thought, "Really? You're going to have a loyalty program on a business that sells $5,000 leather sofas? Good luck with that." And they've absolutely crushed it.

Barker: Yeah, because once you've got the loyalty program, you have to buy a new sofa every year to maximize the value of your membership.

Hill: I don't think it works like that. But it is working.

Barker: It is working. They have dramatically increased their earnings. That is one of the things they pointed to today, and part of, as you pointed out, the mixed story is, they missed on revenues and they're guiding a little bit lower on revenues going forward. OK, that's bad, right? Well, as they point out in their press release covering this, the reason that explains that is, they are not discounting. They are not being highly promotional. They are willing to miss out on some sales to keep their price points higher and their margins higher. Their margins are quite a bit higher than they had been in the past. I think their operating margin's around 13%, which is higher than the average for the S&P 500. For a retailer, that's pretty good.

That is a path that they are saying they're going to continue to do. I think they've got an investor day tomorrow. They've got a new flagship store opening in New York. On balance, I think that other than looking at the stock price retreating to where it was maybe a month ago, two months ago, something like that, it's still up nearly a triple over the last 52 weeks.

Hill: Have you ever been to a company's investor day? Not necessarily this company, but just any company?

Barker: Yeah.

Hill: I'm curious what, as an analyst, are you getting out of an investor day that you wouldn't out of, say, a quarterly conference call or something like that?

Barker: They'll give you maybe three or four hours instead of one. It's more about the state of the company in the future rather than the quarter. It's a lot of PowerPoint presentations, and you have presentations from different people, it's not all the CEO or all the CFO, as an earnings call is. And, you get more food out of it, too. You could get a decent lunch, maybe some tchotchkes, maybe some swag. I got Kobe beef at one of these things.

Hill: Really?!

Barker: Last year, yeah.

Hill: Do you remember what the company was?

Barker: Yeah, NMC Health.

Hill: A health company was giving out Kobe beef?

Barker: Nothing healthier than beef, right?

Hill: Only coffee.

Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tapestry. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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