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This Growth Stock Just Shocked Wall Street Again

By Demitri Kalogeropoulos - Jun 14, 2021 at 11:30AM

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The luxury furniture niche is still booming, and it might have a long growth runway ahead.

Investors had high expectations heading into the fiscal first-quarter report from RH (RH -4.99%), the luxury home furnishings specialist. But the company easily passed even those bullish Wall Street predictions.

Sales are still being lifted by explosive industry growth, and RH improved upon its already industry-thumping profitability. That news, plus management's upgraded outlook for the year, imply the company has plenty of room to expand toward its ambitious long-term goals.

An open floor plan living room and kitchen.

Image source: Getty Images.

Luxury is in

RH's fiscal first quarter went up against an unusually weak period a year ago when consumers were still in lockdown mode during the initial phases of the pandemic. But sales still outperformed expectations. Revenue rose 78% to a quarterly record of $860 million. RH said that figure would have been over 100%, too, were it not for shipping delays that pushed some sales outside of the quarter's close. The company is enjoying "the strongest demand trends in our industry," executives said.

The good times rolled into Q2, which is now on pace to see sales growth between 35% and 37%, management predicted. Most analysts who follow the stock were forecasting gains closer to 27%. "Fiscal 2021 is off to a strong start," CEO Gary Friedman said.

Margins are up

Arguably the bigger factor in RH's stock price surge is its impressive profitability spike. That trend continued in Q1 as adjusted gross profit margin jumped to 47% of sales from 42% a year ago on strong pricing for luxury furniture products. Adjusted operating margin ticked up to 23% of sales from 22% in the prior quarter, too, which is great news for shareholders who buy into management's prediction of eventually reaching 25% operating profitability with a far higher annual sales figure.

RH Operating Margin (TTM) Chart

RH Operating Margin (TTM) data by YCharts.

RH already enjoys an industry-leading margin figure, and reports like this one are evidence that this is more of a core competitive strength of the business rather than a temporary blip.

Looking ahead

The second half of the year won't be nearly as strong as the first half, management warned, mainly because the year-over-year comparisons get much harder in Q3 and Q4. However, in a conference call with investors, RH ticked off a long list of factors that should support accelerating growth in 2022 and beyond. These items include a healthy real estate market, low interest rates, pent-up furnishing demand, and the company's packed pipeline of product launches.

Sure, that favorable selling environment could disappear. But RH says even a pullback wouldn't threaten returns. "We have pressure tested our business assumptions and risks," Friedman said.

As a result, investors can reasonably expect a profit margin of at least 20% even in the toughest selling environments. Yet this latest earnings announcement implies higher efficiency, and booming profits, at least into early 2022. That result should help support the stock's epic rally over the last few years, but it also gives RH plenty of financial flexibility as it seeks to dramatically improve on its $3 billion annual sales pace. A big international push is key to that growth strategy, and that's on the docket for fiscal 2022.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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