The pandemic was a wild time for retailers. Perhaps the company that went on the wildest journey was RH (RH 2.28%), formerly known as Restoration Hardware. The premium home goods and decor brand saw a huge burst of demand in 2020 and 2021 that was not sustained over the past year and a half. Its stock price followed the same path. At one point over the past five years, RH stock was up over 400%. Today, it's off nearly 70% from its all-time high.
But it looks like the business may be on the road to growing again. Management has a bold long-term vision that could entice investors who don't mind a little risk. With the stock down in the dumps, is RH ready to make shareholders richer?
Surviving the pandemic bullwhip
Targeting wealthier clientele, RH has 68 stores -- which it refers to as galleries -- across North America (with a single London location) in high-income neighborhoods. These galleries are built from the ground up with architectural beauty in mind and stocked with expensive home decor. RH wants shoppers with significant disposable income to make a routine of coming to its galleries.
During the pandemic, demand for household furniture and decor skyrocketed as people spent money on renovations, redecorating, and more. You can see this inflection in the chart below. RH went from around $2.8 billion in trailing-12-month revenue before the pandemic to $3.9 billion at its height in 2022. Profitability followed suit with the company's operating margin reaching 25% at its peak. As many companies have learned the hard way, this pandemic-fueled growth didn't last. Trailing revenue is down to $3.2 billion, while operating margin has fallen to about 17%.
This bullwhip effect has affected numerous retailers over the past few years. However, management thinks it has now reset its business and is looking for more "normalized" operations over the next few quarters.
Data by YCharts.
A bold long-term vision
RH has traditionally been a North American retailer with locations in the U.S. and Canada. It makes money through its comprehensive and curated catalogs to drive both in-person visits and online sales. Over the next decade, it wants to make some ambitious expansions to become a luxury lifestyle brand.
First -- and perhaps least ambitious -- is its plan to open more galleries around the world. These include places like the United Kingdom, France, Germany, and Australia, in order to expand its potential customer base. It's also trying to open smaller galleries in less populated but affluent markets such as the Hamptons or Palm Springs. Management believes this will help it return to revenue growth over the next few years along with a normalization of spending in its industry.
Beyond its retail operations, RH is building different lifestyle brands. These include RH Guesthouses (luxury lodging for travelers), RH Residences (fully furnished homes), and the ability for members to lease private RH jets and yachts. While a lot of these offerings overlap with the interests of RH's customer base and could lead to an increase in its market opportunity, these are bold and risky bets for the brand to make. It has limited experience in these new categories, which should keep investors cautious when management talks about the potential growth here.
Is the stock a good bet?
If you look at the stock price, clearly the market doesn't believe in RH's long-term strategy. At a current market cap of $4.5 billion, investors are pricing in little to no growth for the business. RH most recently generated $324 million in trailing-12-month net income versus about $200 million in the year before the pandemic. That's a price-to-earnings (P/E) ratio of 13 on its trailing numbers and 21 if you believe its bottom line will continue to fall to pre-pandemic levels. Both are below the broad market average.
With inflation raising prices significantly compared to 2019 and profit margins up as well, it's quite bearish to assume RH will revert to its pre-pandemic numbers. What this means is investors can buy RH's core business at a discount and get all its new initiatives like international expansion and RH Guesthouse for free. They might not all be successes, but the low share price gives you a margin of safety when buying the stock.
Management is confident in this expansion, repurchasing 17% of its outstanding shares in just the fiscal second quarter. This is a huge vote of confidence and indicates management believes its growth strategy holds promise. While you might want to size this position at the smaller end of your portfolio, RH has a ton of upside if the company executes on its plan for this decade.
