What happened
Shares of luxury furniture retailer RH (RH 0.64%), formerly known as Restoration Hardware, are rocketing higher today after the company reported results for its fiscal second quarter of 2020. Q2 net revenue was up less than 1%, which appears lackluster at first glance. But dig deeper and you'll find demand for the company's products is soaring, leading to much-improved profitability.
As of 10:30 a.m. EDT, RH stock was up 24% for the day -- spiking above $400 per share for the first time ever. It's been quite a year for the stock. After crashing more than 50% early in the year, it's gone on to trounce the market -- nearly doubling so far year to date.
So what
For RH, demand is defined as an undelivered order. Once the customer gets the product it's counted as revenue. So revenue was only up marginally in Q2, but total company demand was up 16% year over year. The COVID-19 pandemic complicated the supply chain, so RH wasn't able to deliver products as it normally would.
However, so far, RH has seen few cancellations. This gives hope that strong demand will translate to strong revenue growth over the next few quarters. Furthermore, demand appears to have just started growing. Total company demand was down 1% in May but was 38% higher this August compared to August 2019.
With disciplined management and improving demand, RH's bottom line grew in Q2. According to generally accepted accounting principles (GAAP), diluted earnings per share increased 30% year over year to $3.71. Free cash flow, a non-GAAP metric, increased to $218 million compared to $109 million last year.
"The emergence of RH as a luxury brand generating luxury margins has arrived years sooner than expected," CEO Gary Friedman said in his Q2 letter to shareholders.
Image source: Getty Images.
Now what
Despite the strong demand right now, RH management refrained from issuing guidance for the rest of the year. It believes the suburbanization trend (white-collar workers migrating out of big cities) is real and will provide a long-term tailwind. But it's too early for this retail chain to make concrete projections.
However, looking beyond this year, RH still believes it can provide annual net revenue growth of 8% to 12% and annual adjusted net income growth of 15% to 20% on its way to becoming a $20 billion brand.
