Between the supply-chain crunch, rampant inflation, fears of rising rates, and now the war in Ukraine, growth stocks have gotten hit hard. The Vanguard Growth ETF is down 18% year to date compared to a decline of 11% for the S&P 500 -- and with uncertainty buffeting the market from every direction, it may seem like a bad time to go shopping for growth stocks.
But for long-term investors, the sell-off presents an opportunity. Market conditions will eventually change, and businesses that can keep delivering growth in good times and bad will bounce back. One such stock that is trading at a discount right now is RH (RH 1.32%), the high-end home furnishings chain formerly known as Restoration Hardware.
Image source: RH.
All about RH
RH isn't your typical home furnishings company. It's a luxury brand known for selling things like $3,000 armchairs and $4,000 coffee tables. While the home furnishings industry is highly competitive, RH faces much less competition at the luxury price point than midrange retailers like Wayfair do.
In addition to its designer products and hands-on customer service experience, the company also distinguishes itself with a membership model, which offers customers a discount of 25% and other benefits for a $175 annual fee. The membership program has been enormously successful since it was introduced in 2016. As of January 2021, RH had 434,000 members who drove 97% of its revenue in its core business.
In addition to encouraging spending on RH products and building customer loyalty, the membership program should also help cushion the company from economic volatility as it essentially creates a built-in customer base. It doesn't have to win every new sale from these customers. The membership means RH is their default first choice.
A top performer
RH has already made early investors a pretty penny. The stock is up around 1,000% since it went public nearly 10 years ago, and the company has steadily grown and grabbed market share since then. Annual revenue has quadrupled over the last decade to $3.7 billion. Its operating margin has also exploded in that time, going from the low single digits to 24%, proof that its luxury positioning and membership model have driven growth on the top and bottom lines.
Though the pandemic was initially a challenge to the company, more recently it's been a significant tailwind as rising home prices, desire for more space, and more time at home have spurred demand for its products. While some of those tailwinds will eventually moderate, trends like remote work will be a long-term positive for the company, and increasing home values will give customers more home equity to tap into when considering purchases.
The company also has big plans to expand its core market. In 2022, it will open its first international gallery -- what it calls its stores --- in London. The company is also opening its first hotel -- dubbed the RH Guesthouse -- in New York as a unique way to leverage its expertise in design and furnishings. RH will also make two Gulfstream airplanes and a yacht available to be chartered, another step in CEO Gary Friedman's vision to make RH a luxury lifestyle brand beyond home furnishings.
Doing so will help expand the company's addressable market as management is targeting global revenues of $20 billion to $25 billion over the long term, up six to eight times from where it is today.
Why it's a great time to buy
RH currently trades at a price-to-earnings ratio of just 14, which compares to 24 for the S&P 500. While home furnishing stocks have seen their multiples compress across the board in recent months, RH continues to grow briskly with revenue up 19% in its third quarter. The company should put up solid growth in 2022 thanks to the initiatives above and the resilience of the luxury sector to challenges like inflation, which is less likely to affect wealthier consumers.
RH is set to report fourth-quarter earnings on March 23, and a strong result could help the stock recoup its recent losses, as it's down roughly 50% from its highs just a few months ago.
With a clear track record of success, a visionary CEO who has pushed the boundaries in luxury home goods, and a plan to expand its market both internationally and through new categories, RH still has a lot of growth in front of it. Investors can take advantage of the sell-off and scoop up shares while they're unjustifiably cheap.
