It's stock-split season. Two of the most highly valued companies in the world, Amazon and Tesla, recently excited the investing community with their stock-split announcements.
Now RH (RH 1.57%), a smaller company, has announced a stock split of its own. RH is a niche furniture company, and its shares are owned by investing guru Warren Buffet. Shares trade at $336 as of this writing, much lower than Amazon at over $3,000 and Tesla at over $1,000. What's this all about?
Expensive luxury goods, cheap stock price
RH, formerly Restoration Hardware, is an upscale furniture retailer that promotes its gallery-style stores, where customers can choose their own pieces or work with a staff designer. It takes great pains to style its spaces and create a luxury brand, moving past retail goods and into company-branded hotels, restaurants, and even yacht experiences.
Although many home retailers benefited from lockdown orders at the beginning of the pandemic, as a luxury retailer, RH's sales suffered. Recently, that trend turned around and sales bounced back. But now it's struggling with general macroeconomic changes such as inflation and rising interest rates. These are times when customers typically scale back spending, especially for high-cost goods.
The company released its fourth-quarter earnings report last week, and although it was mostly good, investors were disappointed with another slowdown in sales growth and weak guidance. Fourth-quarter revenue increased only 11%, but full-year revenue increased 32% to $3.8 billion, in line with third-quarter guidance. Net income increased 13% to $147 million, beating Wall Street's average estimate. As for guidance, management is expecting sales to increase 7% to 8% year over year in the first quarter and full-year sales to increase by 5% to 7%. That takes into account continued uncertainty regarding the economy, and even though it's a low increase, it still builds on 2021's success.
Along with the report, RH announced the surprise stock split. In a statement, management said:
The Company believes that a stock split is appropriate in view of the substantial appreciation that has occurred in the share price since the 2012 initial public offering. Although a stock split does not change the value of the Company, we believe that a split should have a number of benefits, including the recruitment and retention of talent. The stock split is expected to be executed in the spring.
Typically, a company splits its stock when the price gets very high, and investors feel priced out. A lower price breaks down barriers to entry -- although these days many investors can invest in any stock with fractional shares. Splitting the stock to attract talent means that it wants to be able to offer stock option packages to recruit workers, and it can do that more efficiently when there are more shares that each cost less. Amazon mentioned a similar idea as part of the reason for its 20-for-1 stock split, saying, "This split would give our employees more flexibility in how they manage their equity in Amazon."
It's more unusual to split a stock at RH's share price. The stock is being split 3-for-1, and investors will get stock that costs somewhat over $100 a share, not so far off from Amazon's stock at around $150 per share after it splits. And although the company didn't mention it as a consideration, the lower share price could make it easier for investors to buy it.
Why did Buffett buy it?
Warren Buffett is known for an investing style that favors undervalued companies. With shares trading at 15 times trailing 12-month earnings, RH appears to fit the bill. It has plenty of growth opportunities in a niche industry, and it has a committed founder-leader who is leading the company with vision. CEO Gary Friedman pointed out in his annual letter to shareholders that RH had outperformed all of the FAANG stocks, which is pretty impressive for a furniture retailer with only 81 showrooms.
Buffett, through his holding company Berkshire Hathaway, revealed a position in RH for the first time in 2019. Although it makes up a tiny percentage of Berkshire Hathaway's portfolio, Berkshire is RH's fourth-largest shareholder.
It might appear that RH isn't a very resilient company based on how easily it falls prey to macroeconomic conditions. In some sense, that would be true -- as it would be in relation to any luxury goods company. However, the flip side is that it does very well when the economy is going well, and historically at least, the economy does well significantly more often than not. That means if you can look past the current pressure, RH has a solid long-term trajectory, and you can get these cheap shares right now.