What happened
After plunging 60% in the first half of 2022, luxury furniture player RH (RH -3.33%) rebounded 25.9% in the second half, according to data from S&P Global Market Intelligence.
RH is undergoing a very interesting brand transformation, closing down mall-based stores while opening massive Design Galleries, raising prices and upping quality as the company seeks to become a true luxury brand in furniture.
However, that transformation story was interrupted in 2022, as the red-hot housing market ran into a wall of rapidly rising interest rates. Yet while RH's growth stagnated along with the rest of the housing market, the company was still able to maintain relatively high margins last quarter.
Meanwhile, some of RH's growth projects that were delayed last year could be catalysts for the stock as they are launched in 2023.
So what
Amid the downturn and construction delays, RH delayed the start of its international expansion, which kicks off at the Gallery at Historic Aynhoe Park, a 16th-century estate in England. Due to construction delays and labor shortages, RH England saw its grand opening pushed back from late summer 2022 to the spring of 2023. Further European expansion is set for 2024, when RH Paris and RH London are scheduled to open.
RH is also pursuing a brand extension into hotels, restaurants, chartered yachts and jets, and fully furnished homes. September 2022 saw the grand opening of its first RH Guesthouse in New York City, the results of which investors haven't really seen yet. And the company just unveiled its newest furniture collection, RH Contemporary, late in the second quarter. The results from that collection should flow through the company's financials going forward as it ramps.
Still, with the housing market slowing at its fastest pace since 2008, RH isn't totally immune to industry headwinds. Last quarter, revenue declined 14% year over year but remained well above 2019 levels. However, RH's adjusted operating margin managed to hang in there, coming in at 20.8% despite the investments in these various growth endeavors. That owes to the capital-efficient business model envisioned by founder and CEO Gary Friedman.
Those revenue and margin declines were better than expected, showing RH's luxury customer remains somewhat resilient even in just about the worst kind of environment for furniture one can imagine. The company also opportunistically repurchased some stock and some of its convertible bonds at low prices in the meantime -- another show of confidence in the long term on management's part.
Image source: Getty Images.
Now what
As long as RH can survive this period, its future could be pretty interesting. Not only should the housing market eventually recover, but if RH's brand extensions into hospitality and travel work out, the stock could have lots of upside.
Perhaps that is why the stock rebounded in the second half, even as revenue and profits declined. With RH's valuation having compressed to just 10 times earnings, investors may now be looking through the current housing bear market to what's on the other side.
While there is always the risk the home furnishing industry downturn lasts longer than expected, RH's luxury-focused business seems relatively resilient thus far, especially from a profitability perspective. With a low valuation and potentially very exciting future as a premier luxury brand, RH's less-bad-than-feared numbers were enough to lure bargain-hunters back into the stock in the second half.
Whether or not those investors are too early remains to be seen, but barring a really bad recession, RH appears set to eventually rise back to its old highs at some point.
