Investors have very different opinions on Wayfair (W 2.08%) and RH (RH 2.28%) stocks right now. Both companies compete in the home furnishings industry, which is contracting today. But Wayfair shares are surging, while RH is in negative territory for 2023.
This performance gap can be partly explained by the companies' latest operating trends. RH is enduring major sales declines right now, while Wayfair appears to be on the cusp of returning to growth.
But there's more to generating solid long-term returns than just relying on quarter-to-quarter sales swings. Let's take a look at these two companies to see which might be the better fit for your portfolio.
Dealing with challenges
Both businesses have taken a hit in recent quarters. That's no surprise given the headwinds affecting the home furnishings industry.
Rising interest rates have slowed the pace of new home sales and pinched shoppers' budgets. At the same time, RH and Wayfair are dealing with the growth hangover effect of soaring demand through most of the pandemic's height. Part of the pandemic revenue spike just pulled forward sales that would have happened in future quarters, making growth harder to come by in 2023.
Wayfair is further along in its rebound path. Sales were down 3% in the most recent quarter and were flat in the U.S. market. RH, in contrast, endured a 20% drop as revenue declined to $800 million from $1 billion a year ago. Most Wall Street pros are looking for Wayfair to achieve flat sales this year while RH's revenue falls 14%. "We continue to expect the luxury housing market ... to remain challenging through fiscal 2023 and into next year," RH executives told investors in September.
Better finances
Yet RH has Wayfair beat on profitability. The furniture retailer generated industry-leading operating profit margin during the high-growth phases of the pandemic, while Wayfair only briefly broke into positive territory.
RH Operating Margin (TTM) data by YCharts
RH has protected its earnings power despite the sales decline in 2023, as well. Management is confident that profit margin will land between 14.5% and 15.5% of sales this year. Wayfair, on the other hand, generated $400 million of losses through the first half of 2023, compared to $700 million of red ink a year earlier. That's why risk-averse investors might prefer RH stock today, despite the company's weaker short-term sales outlook.
The price cut
The good news is that both stocks have been discounted from their pandemic highs, reducing the risk that you'll dramatically overpay for either business. You can own RH shares for less than 2 times annual revenue, down from the 2023 high of 3 times sales. Wayfair's lower valuation of 0.5 times sales reflects its more precarious financial position. But the e-commerce specialist's shares have still become more expensive since the start of the year.
Given that context, most investors will prefer RH stock over its e-commerce peer. RH has demonstrated that it can stay profitable through a wide range of selling environments. Wayfair is moving in that direction with its aggressive cost-cutting program, but it isn't clear how well this strategy will work, or whether it will end up harming customer loyalty. Wayfair reported an 8% drop in its active shopper base last quarter, after all.
Thanks to general market pessimism, shareholders could see good returns in either case. Still, Wayfair's weak record on earnings makes the growth stock much less attractive as a long-term investment.
