Millions of investors follow Warren Buffett's moves very closely. In looking at the stocks that Buffett makes part of the investment portfolio at insurance giant Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%), you can learn a lot about his investing style and get some ideas about which companies are likely to outperform their rivals in their respective industries.
When upscale luxury home furnishings retailer RH (RH 3.98%) became part of the Berkshire portfolio a short while ago, many investors were surprised. Yet RH's effort to build a unique brand identity through a membership-based business model has helped the company convert on a massive turnaround from near-bankruptcy. Even though RH's fourth-quarter financial report left some things to be desired, the company has a lot of optimism about its future, and it has a plan about how to make it through the coronavirus crisis with plenty of chances for success down the road.
How RH fared coming into 2020
RH's fourth-quarter results weren't perfect, but they did indicate the relative strength that the company has enjoyed for a while. Holiday quarter revenue slumped 0.9% to $665 million, but RH still saw total sales climb nearly 6% for the full 2019 fiscal year to $2.65 billion. Moreover, adjusted earnings weighed in at $3.72 per share for the fourth quarter, up 27% from year-ago levels and completing a year in which RH's bottom line was up by nearly half from fiscal 2018 levels.
Unlike many companies, RH has shifted its focus away from sales growth at any cost and toward being smarter about the business it cultivates. That showed up in its margin figures, with adjusted operating margin for fiscal 2019 jumping almost three percentage points to 14.3%. The holiday quarter weighed in at an even more impressive 17.4% adjusted operating margin, reflecting the efforts RH has made to concentrate on its most lucrative product lines.
What the coronavirus has done to RH
Yet the coronavirus pandemic has had a big impact on RH. The company closed its stores in mid-March and will keep them closed until further notice. As CEO Gary Friedman explained to shareholders, RH is seeing demand down 40% or more in its core business because of the store closings.
The retailer has also had to rethink its entire growth strategy. RH has thrived on store expansion, so delays in plans to open new stores will necessarily reduce that aspect of its growth.
How RH is fighting back
Friedman outlined his planned responses during RH's quarterly conference call. The most important parts of the plan include the following:
- Deferring all of RH's planned new business launches.
- Looking at advertising and marketing costs, specifically whether it should keep sending out all of its books to members or take a more selective approach.
- Evaluating capital spending needs with an eye toward preserving capital for best use.
- Continuing to focus on elevating the brand.
It's that last point that's most resonant with what we've seen from RH before. Friedman noted that the retailers that investors should really worry about are those with huge stockpiles of Easter-specific merchandise that's about to become out-of-date. "If you want to think about short-term risk," the CEO said, "that stuff's a disaster." RH's decision to phase out its holiday assortment of goods had some impact on sales, but it indicates the company's desire to get out of what it sees as lower-quality merchandise -- "tchotchkes," as Friedman refers to it.
By sticking to its long-term plan, RH sees itself reaching $5 billion in North American revenue in the not-too-distant future. International expansion could make RH a $20 billion global brand -- and give it nearly eightfold growth from 2019's numbers.
RH investors seemed to focus primarily on the short-run obstacles that the retailer will face. However, longtime investors were pleased with the determination that Friedman showed in ensuring that RH stays true to its core mission and works as hard as it can to keep its strategic vision intact. That plan of attack is characteristic of the companies that Warren Buffett includes among his investments -- and one many companies should use to fight the coronavirus effectively.