RH (RH 2.75%) investors have been on a roller-coaster ride this year. The home furnishings specialist's stock has been up by more than 40% in 2023, and it's been down by nearly 20% as well. Shareholders' current returns are running closer to that negative result, with the stock down slightly compared to the wider market's 11% increase.
The short-term outlook is cloudy for its business, to be sure. But investors have some solid clues about where sales and earnings trends might be heading. So, let's look at whether the next year should be a positive or negative one for RH stock.
Latest trends
RH's most recent operating results painted a picture of a strong business operating in a difficult selling environment. Sales fell hard in Q2, declining to $800 million from nearly $1 billion a year earlier. That's no surprise given how strong the luxury furniture market was last year, and how weak demand has become in recent months. Inflation and rising mortgage rates have slowed new home sales and have pinched buyers' budgets, too.
NYSE: RH
Key Data Points
Yet RH still surpassed management's short-term outlook last quarter. Its operating profit margin was excellent at over 20%, and cash flow is solidly positive. It's a testament to the strength of the business that RH can maintain these positive financial trends even as industry peers like Wayfair are posting expanding net losses.
The reason for the discount
That said, there are also some good reasons for investors to feel cautious about this business. Management said back in July that they weren't predicting a recovery at least into early 2024, for example. "We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year," executives said in a recent letter to shareholders. Most Wall Street pros are looking for RH's sales to fall 14% this year while only recovering part of those losses with an 8% increase in fiscal 2024.
There are risks to the downside in that forecast if a recession develops over the next few quarters. RH's luxury focus might insulate it from some of those pressures. Yet the company could also see a prolonged demand downturn that would make it hard to keep annual earnings on the upswing.
RH stock's path
One risk that seems relatively minor right now is that an investor would be overpaying for this business. Shares are priced at just 2 times annual sales today, down from 2023 highs of over 3 times sales. The same trend holds for the price-to-earnings ratio, which has declined to below 20 from over 30. The valuation seems more than reasonable for a retailer that's on track to post an over 15% operating profit this year.
Cyclical pullbacks are a feature of every retailing niche, and so the real test of a business is whether it can profit through those downturns while continuing to invest in long-term growth initiatives. The indications so far are that RH is achieving this healthy balance. As a result, investors shouldn't be surprised to see this stock deliver market-beating returns in the year ahead and further down the line.
