What happened
Shares of RH (RH 0.64%), formerly known as Restoration Hardware, gained 21.7% in value last month, according to data provided by S&P Global Market Intelligence.
The luxury home-furnishings retailer reported a strong finish to fiscal 2020, with revenue and adjusted earnings beating Wall Street's expectations. An upbeat outlook and optimism surrounding the company's long-term expansion plans appear to have bolstered investor enthusiasm last month, sending the stock price higher.
Image source: Getty Images.
So what
The pandemic sparked a wave of new demand for home goods. RH benefited from this trend, as revenue increased 8% for the year and 22% during the fiscal fourth quarter. On an adjusted basis, earnings per share soared 53% in fiscal 2020, reaching $17.83, which did a lot to push the stock price to new highs.
In the earnings report, CEO Gary Friedman summed up the company's success: "We are building the most comprehensive and compelling collection of luxury home furnishings in the world. The desirability and exclusivity of our product amplified in our inspiring spaces has enabled us to gain significant market share with RH Core demand up 36% in the fourth quarter."
The exclusivity of RH's product is also leading to pricing power, which is a sign that RH might be building a competitive moat. Adjusted gross margin increased 4.8 percentage points in the recent quarter, reflecting higher selling prices.
Now what
Management is planning to expand overseas, with RH England and RH Paris set to open in 2022. Friedman pointed out that RH finished fiscal 2020 with less than $3 billion in revenue, but the company's internal data shows a market opportunity of nearly twice that in North America and a global market worth between $20 billion to $25 billion.
The recovering economy and strong housing market could be good for this retail stock in the near term. Management expects another strong quarter, with revenue growth of at least 50% for the first quarter. For fiscal 2021, the outlook calls for revenue to increase 15%-20% year over year.
After a sharp rise over the last year, the stock now trades at a high forward price-to-earnings ratio of 28.6, but perhaps this is justified. At this valuation level, further gains will likely depend on how well management executes its expansion plan and how much demand for home furnishings remains in the near term as COVID-19 vaccines are distributed. The latter is the primary risk to RH's business momentum in the near term.
