Just because you think the world is falling down around you now doesn't mean you don't continue to look where you will be five, 10, or 20 years down the road -- and plan accordingly.
That's the way RH (RH 1.99%) CEO Gary Friedman views the current situation the luxury furniture retailer finds itself in. So even though the housing market is collapsing, the retailer is focused on the future.
Image source: Getty Images.
"We're trying to just look at the patterns and look ahead and say, what's the best way to play this, where we come out and we really are positioned for the next five to 10 years, not the next two to three quarters or even the next five or six quarters," Friedman said. "That's not relevant long term."
That's the sort of mindset an investor wants to see in a management team: an eye on the ultimate prize, not what Wall Street wants for the next quarter or two. So let's see where RH might find itself five years from now.
Spending its way to growth
As Friedman told analysts, housing is in "free fall," and with interest rates rising faster than anyone has ever seen, it's creating a situation that's somewhat unprecedented, even if we've been through boom-and-bust cycles before.
Many executives would take this as a sign to hunker down and protect the rear. Not RH. Friedman is actually on the move, expanding not just its existing footprint, but what the luxury retailer can become. He plans to spend his way through whatever recession might come, though not on frivolous things like stock buybacks, which he sees as a prescription for a disaster.
"We're not going to necessarily change the world through a buyback strategy," Friedman said, pointing to others that had wasted money on them and went bankrupt. "Bed Bath & Beyond will probably be the next one that does," he said, after its foolish $1 billion repurchase program.
Rather, what you will see RH do is further enhance its credentials as a luxury brand. Although Friedman says the retailer is not on the same elevation as a Chanel or Louis Vuitton, it's not stopping him from building the company to ascend to such heights.
Housing hit hardest
Part of that is diving deeper into its market so that not only is RH dominant in the $170 billion home furnishings market, but also in the $1.7 trillion North American housing market.
It was almost two years ago that RH announced it was entering the real estate market in Aspen, Colorado, with an idea toward developing not only a hotel, restaurants, spas, and retail stores, but also fully furnished luxury homes, condominiums, and apartments with integrated services. Friedman then wants to take it global.
That might be a tough sell in the current environment. Almost 30% of all home listings in Colorado have had their asking prices cut, according to Realtor.com, and even in tony Aspen where the average residential home is priced at $9.5 million, transactions are down 43% in 2022.
Still, Friedman continues to look beyond the current crisis. Where others are turning tail, he said RH is "kind of speeding up. We're more excited, less fearful."
Image source: Getty Images.
Eyes on the future
Without question it's a lot of bold talk, and the immediate future is likely going to be some tough sledding. Revenue was down 13% in the third quarter, margins were contracting, and earnings of $5.67 per share were down 19% from the year-ago period. RH's stock has lost half its value in 2022.
And there are indications even the well-heeled are starting to feel the pinch of inflation, with Walmart attracting consumer households with incomes over $100,000. That means RH stock could go lower in the quarters ahead.
Yet for the long-term investor (which you should be), RH could be attractively valued. The stock trades at 11 times trailing earnings and 13 times next year's estimates, and while a price of 17 times free cash flow is not bargain-basement territory, neither is it inflated.
If you have your eyes set on where the luxury retailer can be in five years' time (as management is), then now could make for a good time to buy, even if it means you don't catch the lowest price.
