What happened
Luxury home furnishings company RH (RH 1.32%) stock fell 12.4% in October, according to data from S&P Global Market Intelligence. The move marks a snapback in sentiment after a very strong September for the stock. The sell-off in RH's stock comes in line with the 2.8% decline in the S&P 500 and represents the market's sense of caution around the question of what's next after the economic recovery in the third quarter.
RH is seen as emblematic of this question because it's a luxury product company relying on consumer discretionary spending on the home. It's seen as something susceptible to a slowing economy when consumers are feeling financially constrained. On the flip side, companies like RH can do very well in an economic upturn.
RH is hoping spending on high-end homes continues to remain strong. Image source: Getty Images.
Indeed, the company's performance in 2020 has been excellent, with a combination of surging operating margin and low single-digit revenue growth leading to a 72% increase in adjusted operating net income in the second quarter.
So what
In a sense, the move down in October is a salutary reminder that there are many uncertainties ahead for the economy after the euphoria of the third-quarter recovery is over. For RH, much will depend on conditions in the housing market. When individuals feel that their net asset worth is rising, then they are usually more willing to spend on those assets. In addition, RH has been a beneficiary of the stay-at-home measures which have focused consumers on improving their homes.
Management believes the current favorable trends will continue, saying in the earnings release that it thinks "it's safe to assume that some level of elevated spending on the home will remain through 2021, and possibly beyond." The "elevated spending" comes at a particularly opportune time as RH is shifting its products toward the high end in order to capture more of the premium end of the market.
Now what
Looking ahead, investors will want to see if RH can continue to attract spending on its increasingly high-end products in line with management's aspirations. If so, then the dip in October will be seen as a good buying opportunity into a company that's becoming a play on the luxury goods sector.
