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Why RH Stock Dropped 33% in March

By John Ballard – Apr 6, 2019 at 4:45PM

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Soft demand caused revenue growth to disappoint in the recent quarter.

What happened

Shares of RH (RH -0.36%) plunged 33% in value last month, according to data from S&P Global Market Intelligence.

RH stock, formerly known as Restoration Hardware, was already down more than 10% for the month ahead of the fourth-quarter earnings report on March 28. The company's quarterly earnings results failed to please investors, causing the shares to nosedive.

A leather lounge chair in front of a fireplace.


So what

After posting double-digit growth in revenue in the year-ago quarter, the most recent quarter showed demand significantly falling off. Revenue was flat year over year in the fourth quarter and up only 3% for the full year. For that, management blamed the recent market volatility, negative trends in the high-end housing market, and recent efforts to cut unprofitable and non-core areas of the business. 

However, management has emphasized that it prioritizes growing profits over revenue, and last quarter's performance reflected this focus. Even with demand weak, operating margin jumped to 15.4%, compared with 10.3% in the year-ago quarter. This drove robust growth in adjusted earnings per share of 78% year over year for the recent quarter.

Now what

RH does things differently from the typical retailer. For example, while other retailers are doubling down on digital capabilities, RH is doing the opposite by focusing on running better stores and not giving into the temptation to run promotional discounts to drive sales growth -- which would hurt margin. 

This unorthodox approach made the revenue declines more severe last quarter, but CEO Gary Friedman explained that RH will continue to do things differently to deliver superior returns over the long term:

We've grown comfortable making ourselves and others uncomfortable for nearly two decades, and hope to continue for the foreseeable future. It's what leaders do, and how we know we're on the right path. It's why you should count on us to take the road less traveled, and make the long term decisions that we believe will continue to inspire our customers and generate the highest returns in our industry for years to come. 

Given that the stock price is up 236% since the IPO in late 2012, it's hard to disagree with Friedman's style.

John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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