When RH (RH 3.80%) reported results last week, some shareholders were likely looking to see how many shares the company repurchased. After all, the $2 billion increase to its share repurchase program, announced in the middle of 2022, represents a third of the company's current market capitalization. A buyback like this could really move the needle.
But to some investors' surprise, the retailer actually pulled back on its share repurchases, buying back just over a tenth of the shares it bought back last quarter. While this might initially sound like bad news to investors, a closer look reveals it's likely a smart move.
RH's impressive history with buybacks
One reason some investors likely watch RH's buybacks so closely is because of its notable history of creating shareholder value through repurchases. In 2017, the company shocked investors when it announced that it had bought back over 20.2 million shares, or about 50% of its total share count, during the first seven months of the year.
This news came just as the company's transformation efforts led to significant free cash flow generation. The stock is up about 280% since the company announced the execution of this buyback.
So when RH said in June that it was authorizing an additional $2 billion for share repurchases, on top of the $450 million it had left in a previously announced program, some shareholders may have assumed another monster buyback was in the works.
RH wants to be strategic
While investors shouldn't rule out the odds of another big buyback executed in a short time frame, it's looking increasingly unlikely -- at least with the stock at this price and the luxury home market in its current condition.
The company's decision to be conservative with its buyback could be interpreted as a sign that management thinks RH's stock could fall. And there's some truth to that. RH CEO Gary Friedman pointed out in the company's third-quarter earnings call that the housing industry "is in a free fall." This is especially true for the luxury home market, he explained. A market like this could, indeed, hurt RH's stock even more than it already has.
For what it's worth, however, Friedman also said in the company's third-quarter shareholder letter that his excitement for RH's "long-term opportunity has grown exponentially..." The company's recent investments "to elevate and expand our product and platform will once again be transformative," he explained.
Despite his optimism about the long term, RH wants to remain measured with its buyback program, particularly in light of the incredibly uncertain market conditions the company is operating in today.
When asked during RH's earnings call about why RH's buyback cadence was lower during the quarter, Friedman's answer included two important points. First, he noted that the buyback is not a top priority for the company. "[W]e're not going to necessarily change the world through a buyback strategy," he explained.
Second, he emphasized the importance of remaining prepared for any worst-case scenarios. "[W]hen you're going into ... a storm that you haven't seen before, ... you don't want to spend all your fuel before you can see the shore and run out and be floating around out there."
In other words, a poorly timed repurchase program can actually destroy shareholder value, so RH would rather remain prepared to be even more opportunistic if the stock were to fall further than risk buying the stock aggressively at the wrong time.
A wise management team
This is a prudent move, considering RH's gloomy near-term outlook. Management said in its third-quarter letter that RH expects its "business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated monetary policy and the cycling of record COVID-driven sales and backlog reductions."
Of course, the market is a forward-looking mechanism. Challenges ahead should be priced into the stock -- and based on the stock's price-to-earnings ratio of less than 9 at this writing, they arguably are. But it's impossible to know both the extent of any near-term sales declines and the market's reaction to it. Caution from management, therefore, makes sense.
Overall, RH's measured approach is a win for shareholders. Sure, the company risks being too conservative about deploying its capital to buy back shares. But management is still repurchasing some shares. In other words, it's not trying to time the market.
RH has repurchased more than 1.1 million shares over the last two quarters. Its measured approach shows an impressive level of prudence from management. As uncertainty looms, RH seems prepared for just about anything.