RH (RH) investors had a good day on Friday – but maybe it was too good. The feeling of optimism was extreme, or at least very high, and it’s wise to be cautious now. Overall, I am neutral on RH stock because the company is doing fine but the shares may have gotten ahead of themselves in light of the RH’s actual results.
RH operates a chain of high-end retail furniture stores. If you’ve seen the company’s stores or have been a customer for a while, then you may remember RH as Restoration Hardware. That’s a funny name, since RH’s furniture isn’t “restored” or pre-owned; it’s new and typically known to be high-quality but also somewhat pricey.
As you might expect, a high-end furniture store chain like RH will be sensitive to changes in the inflation rate. The Consumer Price Index (CPI) inflation gauge has come down during the past year, but the market’s exuberant response to recent results was probably excessive. Investors should be cautious at this point.
RH’s Quarterly Beats Weren’t Spectacular
RH released its second-quarter Fiscal Year 2024 results on the afternoon of September 12. RH exceeded Wall Street’s top-line and bottom-line expectations, but these weren’t very wide beats, and they didn’t represent a vast year-over-year improvement. This supports my neutral stance because RH’s results, although respectable, don’t necessarily justify a strong sense of optimism for the near term.
Let’s start off with the headline results. First of all, RH generated Q2-FY2024 revenue of $829.7 million, while the analysts’ consensus estimate called for $824.5 million. Sure, that’s a beat, but only by 0.63%. I would classify the sales number as pretty much in-line with what Wall Street had expected for RH.
Furthermore, RH reported adjusted (non-GAAP) earnings of $1.69 per share versus the analysts’ consensus estimate of $1.61 per share. That’s a beat, but only by a margin of around 5%. Again, it’s respectable, but it’s nothing to cheer excessively. This is one of the reasons that I feel neutral about RH stock. I’m not bearish, but I’m also not eager to buy shares.
RH’s Results Need to be Put into Context
Additionally, RH’s sales and EPS data need to be put into context. The company’s $829.7 million in quarterly revenue signifies year-over-year growth of 3.6%. That’s not terrible, but it’s also not jaw-dropping. Also, RH’s adjusted EPS of $1.69 isn’t even close to the company’s EPS of $3.93 from Q3 of FY2023.
Moreover, those aren’t the only Q2-FY2024 statistics that prospective investors ought to pay attention to. Notably, RH’s GAAP-measured gross margin declined to 45.2% from 47.5% in the year-earlier quarter. Additionally, the company’s EBITDA margin fell from 24.7% in Fiscal Year 2023’s second quarter to 17.2% in the second quarter of Fiscal Year 2024.
Perhaps most alarmingly, RH’s free cash flow (FCF) of -$37.9 million represented a steep drop from $114.2 million (positive, not negative) in the year-earlier quarter. This just goes to show that the headline sales and EPS figures don’t always tell the full story of how a business is doing, financially speaking.
RH’s High Valuation Is a Concern
RH’s most recent set of quarterly results definitely weren’t perfect. Plus, the company’s headline numbers beat analysts’ consensus estimates but not by gigantic margins. Yet, RH stock soared 25.49% to $321.87 on Friday. This occurred, most likely, because of RH’s optimistic sales guidance, and now the company has a high valuation. This supports my neutral outlook because it’s risky to invest in a company with lofty expectations and an elevated valuation after a big share-price rally.
RH’s quarterly results, which we just discussed, don’t seem to justify a 25.49% stock price move. Presumably, short-term RH stock traders reacted to the company’s expectation that demand for RH’s products might double in the current quarter. In addition, RH anticipates that the company’s “demand trends” will “accelerate throughout fiscal 2024 and into 2025.”
It’s quite optimistic for RH to predict that demand for the company’s products could double in the current quarter and “accelerate” during the coming quarters. There’s no guarantee that any of this will actually happen, but it feels (to me, at least) that short-term traders immediately priced these hopeful projections into RH stock on Friday.
Since RH stock jumped 25%, but the company’s EPS certainly didn’t increase by 25%, RH’s valuation may be elevated now. The numbers bear this out, as RH’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is a whopping 185.14x, versus the sector median P/E ratio of 18.15x and RH’s five-year average P/E ratio of 31.21x.
Is RH Stock a Buy, According to Analysts?
On TipRanks, RH comes in as a Moderate Buy based on five Buys, eight Holds, and one Sell rating assigned by analysts in the past three months. The average RH stock price target is $328.92, which approximates the latest market price.
If you’re wondering which analyst you should follow if you want to buy and sell RH stock, the most profitable analyst covering the stock (on a one-year timeframe) is Steven Forbes of Guggenheim, with an average return of 52.88% on RH stock and a 65% success rate. Click on the image below to learn more.
Conclusion: Should You Consider RH Stock?
RH might live up to the company’s optimistic near-term demand-growth outlook and justify its high valuation, but that remains to be seen. For now, it seems that the ultra-forward-looking market already priced in an assumption of massive success for RH.
It’s risky, generally speaking, to chase a stock when the market just went on a bidding frenzy, especially if a company’s actual results aren’t spectacular. I’m describing RH right now, of course, and with RH’s elevated valuation in mind, I’m staying neutral and not currently considering hitting the “buy” button with RH stock.
