What happened
Shares in high-end home furnishings company RH (RH 2.62%) surged 35.2% in November, according to data provided by S&P Global Market Intelligence. The move completes yet another month of double-digit gains or losses in the month. However, investors in the company won't worry too much about the down months because the stock is up 115% on a year-to-date basis.
So what
The reason behind the volatility comes down to the investing bull and bear debate over the stock. On the one hand, the bears are worried about the relatively high valuation -- the stock trades on 27 times forward earnings. In addition, there is a fear that the current strength in earnings comes down to non-repeatable demand created by stay-at-home measures.
Image source: Getty Images.
On the other hand, bulls will argue that the company's results this year are a testimony to management's attempts to increase the quality of its product. Indeed, management argued on the earnings release that "our record margins and profitability are systemic. We are benefiting from the COVID-driven shift of spending in favor of the home, but this has coincided with a systemic shift and leapfrog of our operating model to a level unseen before in our industry."
For reference, the company's second quarter revenue of $709.3 million was flat on the same period last year, but a surge in profit margin to 19.3% from 14.7% led to a 31% increase in operating income to 31%.
Now what
Frankly, it's very difficult to tell whether RH's margin increase really is systemic or a function of temporarily strong demand from stay-at-home measures. In this line of thought investors should keep a close eye out on margin when the company gives earnings on Dec. 9.
Nevertheless, whatever happens with margin, the fundamentals in the housing market remain positive, and spending on home improvement remains strong. So, don't be surprised if RH continues to see good underlying demand when it gives its third quarter earnings.
