If you bought shares of luxury home-furnishings company RH (RH 2.26%) five years ago, pat yourself on the back. The stock is up 184% from where it traded back then, far outpacing the 62% return for the S&P 500 during this time.

Several things worked in RH's favor over the last five years and drove its market-beating performance. These factors might not provide the same boost to business over the next five years. But if that's the case, what kind of returns can investors expect from RH stock from here?

The last five years for RH

With stocks, anomalies can occur over months and quarters. But over the course of years, clear business trends emerge and help explain why a stock is up or down.

In the case of RH stock, here are the three factors that I believe contributed most to its market-crushing returns, from most significant to least significant.

  • Operating margin expansion: In mid-2020, RH CEO Gary Friedman wrote: "We have spent decades building a business model that generates industry leading profitability and return on invested capital, and believe, like Bernard Arnault, 'Luxury goods are the only area it is possible to make luxury margins.'" It's a statement indicative of the journey the company has been on.

    In its fiscal 2018, RH's operating margin was 11.5%, which is quite good. But in its fiscal 2022 (which ended in January), it was an incredible 20.1%. This means the company is earning almost twice the operating profit from the same amount of revenue. This profit growth was an incredible boost to the stock price.

  • Revenue growth: Not only have its profit margins expanded, RH has also grown its revenue. Fiscal 2022 net revenues of nearly $3.6 billion were 44% higher than net revenues of $2.5 billion in fiscal 2018.

    RH actually has fewer stores today than it did five years ago, but it's relocated many locations to larger buildings. The end result is that the company ended fiscal 2022 with about 18% more square feet of selling space than at the end of fiscal 2018. Having more floor space for its goods seems to have helped with revenue growth.

  • Share repurchases: Finally, when companies repurchase their own shares, each remaining share represents a bigger percentage of the underlying business, which can make them more valuable. RH isn't a systematic buyer of its own stock. But it does make purchases from time to time.

    Over the last five years, RH's share count has dropped more than 13%, which is an added boost to overall returns.
Chart showing RH's average diluted shares outstanding, revenue, and operating margin all down since 2022.

RH Average Diluted Shares Outstanding (Quarterly) data by YCharts

Certainly there's more to it than this. But with RH, revenue growth, operating margin expansion, and a lower share count have played primary roles in the stock's stellar performance.

The next five years for RH

Surprisingly, RH may not have been responsible for its operating margin expansion -- it may have only benefited from a temporary reality for the home furnishings space. For evidence, consider the performance of Williams-Sonoma and Ethan Allen Interiors on the chart below.

Chart showing the operating margins of RH, Williams-Sonoma, and Ethan Allen Interiors all down or level since 2022, with RH's currently the highest.

RH Operating Margin (TTM) data by YCharts

It's easy to see that all three of these companies saw massive improvements to operating margins in 2020 and 2021, suggesting this was a general tailwind for all players, perhaps fueled by the housing market boom.

The problem is that RH believed it had achieved the luxury-margin status that Friedman has been talking about for years. Therefore, it believed it could keep raising its prices without consequence. It was wrong.

In its fiscal first quarter of 2023, RH's operating margin dropped to 13.4% as the company was forced to lower prices to move outdated inventory -- something that Friedman has often criticized RH's peers for doing. Friedman later lamented on the conference call with analysts: "I think we were probably somewhat too arrogant in our ability to raise pricing in an easy demand environment."

Chart showing RH's revenue and operating margin down since mid-2021.

RH Revenue (Quarterly YoY Growth) data by YCharts

In short, RH likely won't expand its margins further from fiscal 2022 levels. Indeed, management's own goal is to maintain operating margins around 20%, and it's struggling to do even that.

Therefore, RH stock won't be benefiting from margin expansion in the future like it did in the past. 

That said, RH can still grow its revenue and reduce its share count. The company is expanding into Europe this year, which greatly expands its market opportunity. And as of the end of April, it's authorized to repurchase over $1.4 billion of its stock, which Friedman is likely to do if business results are stable. These things can boost RH stock to the upside in coming years.

However, unless revenue growth is substantial, RH stock will likely be closer to an average stock performer than it has been in the past.