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Why RH Stock Skyrocketed Today

By Evan Niu, CFA – Updated Jun 2, 2020 at 3:56PM

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The parent of luxury furniture company Restoration Hardware lays out plans to boost profitability and expand into a new market.

What happened

Shares of Restoration Hardware parent RH (RH -0.69%) skyrocketed today, closing 17% higher, after CEO Gary Friedman released an annual letter to shareholders. Friedman expressed optimism that the company would emerge from the COVID-19 pandemic stronger and more profitable.

So what

In April, RH took steps to cut costs in response to the pandemic, including furloughing 2,300 employees, laying off another 440 workers, and cutting executive salaries. Those actions are expected to yield $130 million to $150 million in savings this fiscal year.

RH furnishings in a room

Image source: RH.

"Like others, we have taken the expected steps of deferring new business introductions and capital spending, while reducing costs to navigate through the short-term challenges of this crisis," Friedman wrote in the letter released Monday. "Unlike others, and due to our exceptional financial model, we believe we are well positioned to take advantage of the many opportunities that present themselves during times of dislocation."

Now what

Friedman is positioning RH as a luxury brand, opting to focus on improving product quality while other companies tend to reduce quality and prices during recessions. That strategy should allow the furniture retailer to continue expanding margins. Friedman notes that RH has already expanded its adjusted operating margin by 700 basis points (7 full percentage points) over the past two years to 14.3% in 2019.

"We continue to expect operating margins to expand in 2020 despite the current setbacks from COVID-19, and now see a clear path to 20% operating margin over the next few years," Friedman said. The company also plans to expand into the housing market with furnished turnkey homes and condos called RH Residences.

Evan Niu, CFA 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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