Warren Buffett has spoken of the advantages of buying a wonderful company at a fair price, instead of a fair company at a wonderful price. And the recent market sell-off has gone one step further, creating the opportunity to buy some great businesses at discount prices.
One such example is RH (RH 0.95%), formerly known as Restoration Hardware, and Buffett's Berkshire Hathaway is a large investor in the company with an 8% stake. After a 46% drawdown from its 52-week high during the fall, is RH a buy?
Riding the housing tailwind
As a retailer of high-end furniture and home goods, RH benefits from booming prices for homes and increased spending on furnishing them. When people feel good about their dwellings (and the value of them), they are more likely to splurge on things like expensive tables and couches. Permanent items like fixtures, hardware, or lighting could even be viewed as an investment that will augment a property's value.
Last week, Bank of America (BAC 1.06%) predicted that over the medium to long term, it expects spending on home furnishings to remain elevated as consumers continue to spend more time than normal at home, which bodes well for RH. Further to this point, research by sell-side firm Baird shows that Google searches for RH increased 18% month over month in December.
On the company's December earnings call, CEO Gary Friedman talked about revenue for the third quarter of 2021 increasing 19% from the year before and 49% from 2019, so RH is leveraging these trends to grow at an impressive clip.
What I like about Friedman and RH is that they aren't satisfied with these results. The company is working to grow outside of North America for the first time by establishing a foothold in Europe. It's launching RH Residences, which will sell fully furnished luxury homes. It's even debuting RH3, a luxury yacht that will be available for charter.
Memberships for the win
Investors love subscription business models, as they lead to predictable, recurring revenue streams. Since revenue from big-ticket items like furniture can be lumpy and nonrecurring, it is great to see RH generating recurring subscription revenue with memberships.
RH has over 400,000 members in its loyalty program, where $150 per year provides access to 25% off all purchases and a further 20% off sale items. A company like Costco (COST 0.91%) is an example of a successful membership-based business. Furthermore, these subscriptions should help RH to foster and strengthen its relationships with its customers.
Luxury is the place to be
The luxury space is a good place for an investor, since companies in this realm can generate high margins with their pricing power. At the top of the income pyramid, their customers are less price sensitive, and their buying power is less affected by economic downturns.
RH is the most prominent publicly-traded pure play in luxury furniture, generating 49% gross margins. LVMH Moet Hennessy (LVMUY 1.71%) has grown into one the largest companies in the world by market capitalization, cultivating a reputation for luxury and quality, and RH is following in these footsteps.
The company is in good position to establish itself as the industry leader in a fragmented market for luxury home goods. As Friedman has stated:
We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal to position RH as an arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world.
It's reasonably valued
Shares of RH are not cheap at 19 times earnings, but they're not overly expensive, either, at a slight discount to the 20 earnings multiple the stock has traded at historically. And that's a discount to other home retailers like Home Depot (HD 0.55%) and Lowe's (LOW 0.40%).
Is RH a buy?
The recent sell-off offers a rare chance to buy a great company like RH at a very reasonable price, at a time when the company is growing rapidly and expanding into exciting new verticals. I like its vision of creating a luxury home powerhouse at scale. I believe that RH will create a lot of value for shareholders in the years to come.