RH (RH 2.15%), formerly known as Restoration Hardware, recently reported stellar fiscal first-quarter earnings that sent its shares surging more than 10% as of this writing.
While the stock has already climbed 340% just over the last three years, there are three important numbers from the earnings report that explain why investors are enthused by RH's performance, and why the stock could still have more gains in store.
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1. A high operating margin for a furnishings store
RH's fiscal first-quarter (the three months ended May 1, 2021) revenue was impressive enough, increasing 78% year over year to reach $860.8 million. But the company's margin performance was the real standout.
Operating margin jumped a whopping 14.5 percentage points to reach 21.8%. Higher margins boosted adjusted earnings per share from $1.27 in the first quarter of 2020 to $4.89 in the most recent quarter.
RH's business model was built to deliver high margins. For example, the company is not susceptible to the usual risks for other retailers that can pressure the bottom line, such as seasonal inventory. Plus, RH serves customers who have money to spend, so it doesn't rely on discounting inventory during a slow economy to drive sales.
In the quarterly shareholder letter, CEO Gary Friedman suggested these margin levels are sustainable: "You should also rest assured that we have pressure tested our business assumptions and risks and are confident in our ability to maintain an adjusted operating margin in excess of twenty percent in just about any economic downside scenario we can envision."
2. 25% or better revenue growth
Based on current marketplace trends, management expects growth to be even better than previously forecast. Guidance now calls for revenue to rise between 25% and 30% from the last fiscal year. Previously, the company's expected growth range was 15% to 20%.
RH is benefiting from pent-up demand for home renovations, and the reopening of the economy. It just opened RH Dallas in May, and the rooftop restaurant is already booked until August.
3. The CEO sees a $20 billion market opportunity
The company isn't just depending on a strong housing market -- it's going on offense to win market share in luxury home furnishings. Friedman said, "We plan to launch an unimaginable amount of innovative new strategies designed to further elevate and expand the RH brand."
It offers many high-end exclusive collections across several categories, such as RH Interiors, RH Beach House, RH Baby & Child, RH Linens, and many more. This broad portfolio is one reason it can drive strong revenue and margin performance.
RH is also differentiating itself with its lavishly designed stores, or what it calls galleries. It plans to open one in Paris in the fall of 2022 on the Champs-Elysees. Friedman said the new gallery will feature a "decomposed granite path lined with majestic hedges that lead to a garden courtyard where you encounter 18-foot brass doors that open to a six-floor atrium connected by traversing brass staircases and a glass elevator." Investors shouldn't overlook his vision and passion.
RH has secured five locations in London, Munich, and Dusseldorf, Germany, and will soon secure leases for five more that will open over the next three years.
Based on the current strategy, management believes annual revenue can grow to between $20 billion to $25 billion over the long term, or approximately seven times its current size.
A stock priced for more upside
Over the last decade, RH has bucked the trend of the retail industry by steering away from e-commerce and doubling down on brick-and-mortar. The company clearly has a winning formula by creating otherworldly shopping experiences, and the latest quarterly results are another reminder that Friedman's vision is playing out.
What's more, this retail stock is not expensive relative to the company's prospects. The shares currently sell for 30 times forward earnings estimates, but with EPS set to grow faster than revenue due to expanding margins, RH stock still looks like a good investment.
