What happened

Shares of RH (NYSE:RH), the company formerly known as Restoration Hardware, were pulling back today after the company reported third-quarter earnings last night. Though the numbers were strong and beat analyst expectations, they didn't seem to be enough to assuage fears of a hangover when the pandemic ends, as the high-end home furnishings retailer has benefited from significant tailwinds from the crisis. Some investors may also believe the stock is overvalued after it's doubled this year, following a strong multiyear run.

As of 11:36 a.m. EST, the stock was down 4.5% after falling as much as 10% earlier in the session.

An RH lounge chair in a living area setting

Image source: RH.

So what

RH said revenue jumped 25% in the quarter to $844 million, outpacing estimates at $837.1 million, and sales would have been higher had the company not suffered from supply constraints from the pandemic. The company said demand, which represents the total value of orders placed in a period, jumped 33%, and core demand, a measurement of demand from the core RH brand, was up 42%.

Profit margins also surged as management believes RH has achieved luxury status. Adjusted gross margin jumped from 41.7% to 48.4% in the period, and adjusted operating margin doubled from 13% to 26.7% in part from costs saved due to not mailing its Fall Source Books, a decision it made because demand is already straining supply.

On the bottom line, adjusted earnings per share jumped from $2.79 to $6.20, well ahead of estimates at $5.30.

In a shareholder letter, CEO Gary Friedman said, "The emergence of RH as a luxury brand generating luxury margins has arrived years sooner than expected and we now believe we will reach 21% adjusted operating margin in fiscal 2020 with revenue growth of approximately 7%."

Now what

Looking ahead, the company sees double-digit revenue growth and expanding operating margins even as it faces hurdles as it laps strong growth in the second half of this year and it rides a boom in home furnishings. The company believes it will continue to see growth next year due to the shift out of cities into suburbs and more rural areas, as well as the housing boom in second-home markets.

RH is a unique opportunity in the retail industry, and Friedman drew comparisons between his company to Hermes, a luxury brand that has grown to a valuation of $100 billion over the last decade. Though the stock pulled back on the report, RH still has big expansion plans including opening its first guesthouse next year. Its growth days seem far from over.

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