A Look at What's Going on With RH, KB Home, and Rite Aid

In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Bill Barker discuss how RH (RH 0.64%) sold a lot of luxury furniture in the fourth quarter, wrapping up a great fiscal year. Also, KB Home (KBH -0.84%) shares fell despite strong first-quarter profits, and Rite Aid (RAD 5.26%) updated guidance (which sent the stock down 20%). 

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This video was recorded on March 25, 2021.

Chris Hill: It's Thursday, March 25th. Welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We've got consumer health retail, we've got homebuilding. But we're actually going to start inside the home, with the latest results from Restoration Hardware Holdings. Their fourth quarter capped an absolutely fantastic year for this company. Profits and revenue were both higher than expected, strong demand for the high-end furniture, and RH management expects revenue for the current quarter to grow significantly, and not a surprise that shares have already dropped a little bit this morning.

Barker: Up a little bit after being up, plenty going into today, and things other than a little blip down for just about everything a year ago, it's just been great. Although, for the year, revenues were only up 8%. Basically, the stock has doubled from where it was a year ago or a little bit more than a year ago. Charts from exactly a year ago, they all look amazing. You have to back up to February to get a fair comparison. They're about double where they were in February. It's mostly a margin growth story rather than top line. Top line only up 8%, but margins have just improved dramatically. The gross margins are up 540 basis points, and the adjusted margin's up 750 basis points, so you're just making about 50% more on every sale. The sales were up a little bit, sales looked like they're going to keep moving up. I think Warren Buffett's a very happy shareholder, having bought into this about a year-and-a-half ago and has tripled his money.

Hill: The business has performed so well, as you said. If you're just going for the past 12 months exactly, the stock's up 360%. You back it up a little bit more, it's still an impressive increase, not quite in the range of 360%. How should people feel about this stock? Because this is a business that has performed well for a while. Yes, they're capping a great year, but they've performed well for a while. I just look at this and I look at what they're selling, high-end furniture, it's not like people who buy a $5,000 sofa need to refresh that cycle every year or even every few years.

Barker: If you want to feel good about the company, I would recommend reading the shareholder letter, which came out yesterday, and the fourth quarter ended and so this is the end-of-the-year letter. It's got a lot of Buffett in it, and quotes him in particular saying, "Time favors the well-managed company." As evidence of that, they cite their November 2012 IPO, and among the companies that it has outperformed as a stock in that nearly nine years are Apple, Amazon, Google [Alphabet], Facebook, Nike, Starbucks, Home Depot, and just about everybody else but Tesla, as is quoted in the letter. Maybe that's just a product of the stock getting ahead of the business, you might say if you want to take the bear side, and at 60 some times earnings, it is not a cheap stock today. Again, in their letter, I recommended people that might consider investing in the company, they are about a little less than $3 billion in revenues annually, and they're looking at growing to $20 billion to $25 billion as they expand internationally. They see doubling sales in North America and the international being just as a big opportunity. At the moment, you've got to like where they are and where they're going.

Hill: For context, the market cap of RH is $10 billion. The idea that they could get to $20 billion in revenue on an annual basis, you can just imagine what that would do to the overall size of the company.

Barker: Well, they also quoted in the letter, this is a good quote that I remember the chairman and CEO of LVMH saying, "Luxury goods are the only area in which it is possible to make luxury margins." RH is not blowing a lot of money on stores. This is mostly a direct-to-consumer business, despite the fact that if you're in Boston, as you will be next week, we may or may not get to that, Restoration Hardware or RH has a really impressive store out there on Newbury Street or whatever it is. An alarmingly beautiful-looking building from the outside, so that is an aberration. Mostly what they sell in stores is just store models that they're getting rid of. They're mostly an online business.

Hill: First-quarter profits for KB Home came in higher than expected. Net orders were up, deliveries were up, but revenue was a little bit lower than expected. Shares of KB Home falling a little bit this morning. Jason Moser and I talked about Lennar last week, and that management team was very bullish on housing. What was the guidance like from KB Home, and was there anything in particular that stood out to you from this report?

Barker: Yeah. Two thumbs up on the guidance. I think that it's off a little bit today. Of course, the market as a whole is a little bit off and it's backing off of not all-time highs, but highs over the last 10 years. One of the data points that they point to is that these are the highest orders for this quarter that they've seen in 14 years, at which point alarm bells should ring. When you say homebuilders, 14 years ago, what was that? That was 2007 and that was the peak. That doesn't mean that this is a return to any level of craziness such as we saw. In fact, the stock peaked in 2005, I think. Even though it's come way back this year, it's still half the price it was back in 2005. With a cyclical stock like this, people get a little too excited when the cycle is going the right way as it had been going for a long time, going into 2005. The cycle will turn again at some point, and there's little that a homebuilder can do but ride along the cycles. Right now, I think the next wave is going to be pretty good. When you ask about guidance, backlog is up 74% over the last year and that tells you a lot about what the year ahead is likely to be.

Hill: I didn't look at KB Home's call, but I haven't seen anything so far out of them or Lennar about supply chain issues. It's just interesting to me that there are other businesses that are struggling mightily with supply chain issues. At the moment anyway, homebuilders don't appear to be one of them.

Barker: They may not be mentioning it, but [laughs] it's the thing. It's a thing. Lumber I think is still widely available, but the prices have spiked. There is a lot that you can replace in homes if something isn't available, you can use something else a lot of the time. They've got a little bit more flexibility and some of the material, some of the parts that are necessary. They'll run into some troubles, but they're not quite like the just-in-time issues that you're going to see that chips are causing in autos or things like that. But I think supply chain is an element that will come up but more than that as the input costs. That gets passed longer. Consumers, right now, are still pretty flush in terms of their homebuying because although interest rates have gone up, they are still very low for historic purposes.

Hill: Two quick things before our final story. First, our guest on Motley Fool Money this weekend is Rich Allison, the CEO of Domino's Pizza. I got the chance to talk with him earlier this week. I could have talked to him for an hour. Just a great, fun, interesting conversation. Second, if you haven't already checked out the flagship service at The Motley Fool, which is of course, Stock Advisor, check it out. You can get stock recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more. Just go to stockideas.fool.com. You get a 50% discount off of Stock Advisor for being one of the dozens of listeners, so check that out when you get a chance. 

Recently I read a story about how over the past six months, there have been far fewer cases of the flu than we typically see. When I read that, I thought to myself, wait, it seems like there are a lot of businesses that sell products to help you get through cold and flu season, I wonder what's going on with sales of those products because if a lot fewer people have the flu, I'm guessing there's fewer sales of that, and that brings us to Rite Aid. Rite Aid is scheduled to report earnings on April 15th, but this morning, management updated their guidance and said they expect to report a loss for the fiscal year. They said sales of cold and flu-related products fell nearly 40%, and shares of Rite Aid are falling more than 20% today.

Barker: With that brilliant insight on flu seasons and the likelihood that companies we're going to get impacted negatively in some cases, did you go out and short Rite Aid?

Hill: I did not go out and short Rite Aid nor did I short CVS or Walgreens for that matter.

Barker: Would you like a time machine to go back and short Rite Aid, the day that you thought about this?

Hill: If I get access to a time machine, I'm going to use it for something other than shorting Rite Aid.

Barker: [Laughs] Well, sure you might come up with something better, but you would have made a lot of money today on that, on your time machine. Rite Aid, losing money for the year is kind of a broken record, it is not a company which has been able to distinguish itself by making money for years. That part of the preannouncements, I guess, causing some concern for those that became believers in Rite Aid. I think they're mostly maybe waiting for the company to get bought out, to get finished being bought out by a competitor or something and maybe they can bounce back with the vaccine distribution. They do have people coming in to get that so they didn't come in to buy flu treatments at all. Basically, flu is virtually nonexistent in this country and for the last winter. Look, they got to get people in the stores for some reason or another, and sell them some things. They've got a lot of real estate and their revenues really haven't moved up, it's called a decade, it might be a little bit more than that. I don't know what to point to with a lot of hope in the terms of Rite Aid, their competitors are just too competent. At 5% of the market, even with the vaccine distribution opportunities that they have and hopefully will execute well, they don't have the scale at this point to achieve very much.

Hill: They don't have the scale, which is remarkable when you consider the fact that they have more than 2,000 locations, which is probably at least 1,000 more than they should actually have.

Barker: I keep trying to sell them but I think I was reading a report. I think they've got about 5% of the market, CVS 27%, Walgreens 22%. The reimbursement rates for the vaccine have just been, I think, increased. So consumers aren't necessarily being charged anything for their vaccine shots, but the pharmacies are getting, I think $40 a dose now. That's an opportunity for Rite Aid and its shareholders that when people go in to get a shot there, that they buy something else while they're in the store.

Hill: Bill Barker, always good talking to you. Thanks for being here.

Barker: Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you on Monday.