Shares of luxury furniture company RH (RH -4.19%) are down around 67% from their all-time high, as of this writing. And one company is actively buying this dip, spending more than $700 million buying RH stock from November through January. For perspective, its market capitalization (the total value of all its shares) is just $5.5 billion, so this was an enormous purchase.
Some might think the mystery company is Warren Buffett's Berkshire Hathaway. After all, it already owns nearly 2.4 million shares of RH. And Buffett is a known value investor.
However, Berkshire Hathaway wasn't a buyer of RH stock in its most recent update -- although Buffett's wisdom will be helpful in this article. In fact, the buyer of RH stock was none other than RH itself. And this is a very bullish signal from management. Does this make RH stock a buy now?
Here's why RH's buyback is such a big deal
RH's fiscal 2022 ended in January. And in fiscal 2022, the company's net income -- profit -- was $529 million. Businesses have three big options for profits like these. They can invest back in the business to grow. They can pay dividends. Or they can repurchase shares.
To be more precise, RH used almost $714 million to repurchase shares in its fiscal fourth quarter alone. However, I want to rewind the clock one quarter for crucial context.
During RH's fiscal third quarter, it only used $31.7 million to repurchase shares -- 95% less than what it spent in Q4. This is significant because management was authorized to repurchase, at its discretion, over $2 billion in stock at the time.
Last quarter, analysts were seemingly miffed by management's inaction. But CEO Gary Friedman was frank with them on the conference call. He referenced how bad things were getting in the luxury housing market (more on that in a moment) and said, "You don't want to spend all your fuel before you can see the shore."
In other words, RH's business was under duress and management didn't know how long it would last or how bad it could get. Therefore, it opted to keep its cash on hand to weather the storm instead of returning it to shareholders.
To be clear, when trying to create value for shareholders, it's important to not repurchase shares when they're overpriced. As Buffett reminded investors in his 2022 letter to shareholders:
The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose.
In the case of RH in Q3, Friedman said, "We think our stock is undervalued today." Therefore, it wasn't a valuation issue. Rather, RH largely avoided repurchasing shares in Q3 because of external economic considerations.
RH's posture changed dramatically in Q4. And investors should ask why.
What's going on with RH's business right now
Things aren't necessarily going swimmingly for RH right now. Fiscal 2022 revenue fell 4% year over year and its operating margin fell from 24.7% in fiscal 2021 to 20.1% in fiscal 2022. And the downward trend is expected to intensify in fiscal 2023. In the coming year, management is guiding for a 16% year-over-year drop in full-year revenue at the midpoint of guidance. And its operating margin is expected to plunge to just 15% to 17%.
RH Revenue (Quarterly YoY Growth) data by YCharts
Keep in mind that RH's customers aren't garden variety consumers. The overall real estate market is holding up fairly well but not the luxury home market RH is in. Luxury home sales plunged throughout 2022, capping off the year with a whopping 45% year-over-year drop in sales in Q4.
Strong home sales and rising home values can be meaningful tailwinds to RH's business. But right now, headwinds are blowing -- headwinds that blew in Q3 while management desperately searched for the shore.
In my opinion, using $700 million now to repurchase shares is akin to yelling "land ho!" Yes, RH has yet to sail out of the storm. But it's increasingly confident and excited about its prospects this year and beyond.
In the first half of the year, RH's products are getting updated. Friedman said, "We will be unveiling the most prolific selection of new products in our history," which he hopes will lead to better sales in the second half of the year.
Moreover, RH's international expansion plans are coming to fruition this year with the launch of RH England, opening a huge addressable European market.
Is RH stock a buy?
RH's management is investing a ton of money for its growth initiatives even though plenty of macroeconomic uncertainty remains. Investors who buy the stock today aren't investing because the business has already recovered. Rather, investors today are betting on this management team's long-term vision and the pace at which it's attempting to grow while headwinds are still blowing.
If RH's management is wrong about the timing or the intensity of troubles in the luxury home market, then its moves could put the company in a tough financial position. This risk needs to be acknowledged before buying shares.
However, I'm inclined to believe RH's management is making the best long-term moves right now. Whether or not that leads to market-beating gains in 2023, I have no idea. But Friedman has steered the company well through past cycles. And if he's sure enough to invest over $700 million now repurchasing shares, I'm optimistic RH is on the right course as well.
