When looking at the retail-related investments made by Warren Buffett's Berkshire Hathaway, investors often overlook RH (RH 1.66%). Like most of Berkshire's purchases, the company timed the investment in the former Restoration Hardware well.

But amid a massive surge in 2021 and a considerable decline the year after, RH again looks like a bargain stock. Due to the retail stock's current position and its expansion goals, it remains positioned to generate outsized returns. Here's why.

The state of RH stock

At first glance, the investment case for RH may appear counterintuitive. As a luxury furniture and home goods provider, it has struggled in today's slow-growth environment.

In the first quarter of fiscal 2023 (ended April 28), revenue came in at $739 million. Although that beat RH's outlook, it still amounted to a year-over-year decline of 23%. CEO Gary Friedman said on the Q1 2023 earnings call that rising interest and mortgage rates have affected, and will continue to negatively affect, its business in fiscal 2023.

Unfortunately for RH, the cost of revenue and the selling, general, and administrative expenses did not fall as fast as revenue. This led to a net income of $42 million, a 79% drop from year-ago levels.

Amid this news, RH stock declined 3% in the trading session following the report and has dropped by approximately the same level over the last 12 months.

Additionally, negative sentiment likely contributed to a stock price decline of nearly two thirds between the summer of 2021 and the middle of 2022, which wiped out most of Berkshire's net gains in the stock.

Making sense of earnings

However, with a longer-term time horizon, RH could stage a significant comeback. Since Berkshire's team bought this stock in the third quarter of 2019, it has outperformed the S&P 500.

Additionally, the decline since mid-2021 has helped make RH stock ridiculously cheap. Its price-to-earnings (P/E) ratio of 12 is not far from IPO lows and well under the 20+ P/E ratios that Buffett and his lieutenants paid for the stock.

The company also doubled down on its longtime strategy of improving the design and quality of its products. In what it calls the "most prolific collection of new products" in RH's 44-year history, it will unveil 70 new furniture and upholstery collections this year.

RH had previously just operated in the U.S. and Canada. But this summer, it will open its first gallery in the U.K. It has also announced plans to open additional galleries across Western Europe and Australia.

RH's expansion is part of a goal to develop an ecosystem of products and services, taking it from a home furnishings retailer to a company that serves the overall housing market. That move could grow its global addressable market to the $7 trillion to $10 trillion range. Management also noted that capturing just 1% of that market could mean a $70 billion to $100 billion opportunity, which points to RH's massive potential.

Considering its low P/E ratio and long-term track record of expansion, succeeding on a global scale could bring massive returns for Buffett's team and the investors who follow its lead.

Consider RH stock

Investors should probably consider RH while it experiences what is likely a cyclical downturn. Admittedly, an interest in luxury brands seems counterintuitive in the current environment, and the recent financials may validate the skepticism.

Nonetheless, RH has expanded in the U.S. and Canada by delivering the products and designs that people want. As it expands into Europe and Australia, success is far from guaranteed. But if it can replicate its business model globally and build out its products and services-based ecosystem, shareholders who invest now will probably feel happy they bought at 12 times earnings.