What happened
Shares of RH (RH +0.92%) were sliding last month as the high-end home furnishings retailer formerly known as Restoration Hardware got swept up in the broad market sell-off over the Federal Reserve's interest rate increase, and then fell again as weak retail earnings from peers such as Target added to concerns about a weakening consumer and inflation adding to costs.
The headwinds were strong enough to counteract some positive news, including Berkshire Hathaway's increased stake in RH and a stock market rebound at the end of the month.
Image source: RH.
According to data from S&P Global Market Intelligence, the stock finished May down 14%. But the recovery wasn't enough to erase the earlier losses:
So what
There wasn't much direct news out on RH, but at as a high-end consumer discretionary stock, it can be a bit of bellwether for the broader economy, and investors seem to be treating it as such. Shares fell sharply early in May, when the Federal Reserve raised benchmark interest rates by half a point, the first time it's done so since 2000, and indicated it could continue to raise rates at that pace in its next few meetings.
That move sank the broad market and hit RH hard, as higher rates make it more difficult for the company to borrow and more expensive for customers choosing to finance their purchases. It's also expected to slow down the economy, which tends to hit high-end discretionary businesses like RH first.
The stock got a bump on May 17, when Berkshire Hathaway revealed that it had increased its stake in RH, as did Lone Pine Capital. It wasn't clear why Berkshire bought more RH in the first quarter, but the haircut in RH's stock price probably made it more appealing.
However, the next day the stock plunged on weak results from Target as investors feared a bloodbath across the retail sector . The stock continued to decline, before rebounding in the last week of May as the broad market gained and as rival Williams-Sonoma delivered strong first-quarter earnings.
Now what
RH reported first-quarter earnings on June 2 and the company easily beat estimates, though the stock gained only modestly. Revenue rose 11% to $957 million, ahead of expectations at $924.8 million, and adjusted earnings per share jumped 59% to $7.78, blowing past the consensus at $5.40.
However, guidance was weak, with the company forecasting a top-line decline of 1%-3% in the current quarter, and a decline in adjusted operating margin from 26.6% to a range of 23%-23.5%. For the full year, it expects a revenue increase of just flat to 2%, and for adjusted operating margin to decline from 25.6% to a range of 23%-24%, indicating that earnings per share is likely to fall for the year.
While RH still looks like a good long-term stock to own, especially at the current price, it's clear that 2022 is going to be a challenging year.
