It's tempting, to be sure. Shares of RH (RH +2.67%) -- you may know it better as the retailer formerly called Restoration Hardware -- are up 60% from last year's low, yet still down by more than half of their peak value reached in 2021. The stock's not only ripe for a recovery but seemingly already recovering.
Before plowing into a position simply because shares are priced dramatically lower than they were a year and a half ago, however, there's something you should know.
A less-than-ideal backdrop for RH
To be fair, there are some healthy bullish arguments to be made here. Retail spending is holding up rather well, for example. The Census Bureau recently reported January's retail sales were up 3% year over year, topping expectations.
The stock market itself is rebounding too in anticipation of at least some economic growth ahead. The International Monetary Fund forecasts the global economy will cool from last year's growth pace of 3.4% to 2.9% this year before reaccelerating to a clip of 3.1% next year. That's enough hope for stocks to build on beginning now, which in turns inspires confidence from investors. Confident investors, of course, are willing to spend more on high-end goods like the ones RH sells.
By and large, though, RH is apt to face more of a headwind than ride a tailwind in the months (and even years) ahead.
NYSE: RH
Key Data Points
Much of this headwind is rooted in the nature of the post-pandemic economy itself. Yes, we're seeing progress. It's progress being made under the dark cloud of high interest rates, however. The average credit card interest rate is now in excess of 20%, according to numbers compiled by CreditCards.com. That's high enough to make even the biggest of the big spenders balk.
And we're already seeing this particular segment of consumers tighten their purse strings. Department store chain Nordstrom suffered a surprising 3.5% decline in last year's holiday shopping business. The prices of Rolex watches are falling as unsold inventory piles up.
Indeed, while sales of all homes are now slowing, sales of high-end houses are outright plummeting. Online real estate agent/broker Redfin reports that for the three-month stretch ending in November, sales of luxury homes plunged a little over 38% year over year. That's the biggest-ever dip witnessed since the data's been monitored.
It stands to reason if consumers are pulling back their purchases of high-end homes, they're also paring back their purchases of high-end furniture to put in those homes.
Analysts aren't optimistic
Analysts aren't looking for relief anytime soon either, even if the market is pricing the stock as if relief is on the horizon. Consensus estimates suggest another round of declining revenue for RH this year and next, paired with continued declines in per-share earnings. An in-earnest rebound isn't really in the cards until 2025.
Data source: Thomson Reuters. Chart by author.
And that expected 2025 turnaround is based on the assumption the economy will recover as is currently expected, and also on the assumption that luxury seekers will remain in a luxury-minded mood then. Neither may be the case at that time. In many ways, the redecorating done in the midst of the COVID-19 pandemic is crimping home improvements now and into the foreseeable future. Harvard University's Joint Center for Housing Studies indicates U.S. home renovation spending growth is likely to fall from last year's 16.3% increase to a mere 2.6% this year.
Maybe later, but certainly not now
To its credit, RH is responding -- sort of.
For example, rather than lowering its prices to appeal to a wider range of prospective customers, it's doubling down on its luxury shtick. In December, the company explained it's acquiring custom upholsterer Dmitriy & Co and custom furniture maker Jeup as part of an effort to "accelerate the brand's transformation and climb up the luxury mountain."
Part of this same transformation includes the development of luxury homes, restaurants, hotels, and shopping venues. The moves -- and the stated goal behind them -- are a clear message that this brand is for (and only for) consumers willing and able to shell out some serious cash, not just for home decor, but to live a luxury lifestyle.
In many ways, playing up its exclusiveness is a brilliant strategy. It's also a risky one, though. It's not clear to what extent a store chain with most of its footprint being found at an ever-shrinking number of average American malls can build on its existing luxury prestige. And it's not inconceivable that the effort will end up alienating a swath of its regular clientele, with would-be customers seeking out something a little less flashy.
Whatever's in the cards for its distant-future image, there's little doubt the next couple of years will not only be challenging but expensive. Given that there are so many other retailers better positioned to capitalize on the economic environment on the horizon, investors may want to pass on RH for now and find something else instead.
