RH(NYSE: RH) investors have had a roller coaster of a year so far. The luxury home furnishings specialist was up over 50% at one point in 2023, but sentiment has shifted since early August. Shares are down 45% in that period and recently hit a new low for the year.
Drops of that magnitude usually reflect serious concerns on Wall Street about a business's fundamental growth prospects. But in some cases, these worries are overblown or simply too focused on short-term challenges. Let's take a closer look at RH to see whether the stock is an attractive buy at today's discounted prices.
Things will improve
It's true that the last earnings update contained some jarring figures. RH's sales plunged by 20% to $800 million from $992 million a year earlier. Profit margins contracted as well due to pressures from slowing consumer spending. Management sounded a cautious tone about the wider industry, too. "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 conference call with investors.
Still, the worst might have already passed. Executives lifted their cautious 2023 outlook following the Q2 results, and they affirmed their goal of reaching an operating profit margin of about 15% of sales. That's better than most industry rivals could hope for, and the profitability level is also above RH's pre-pandemic rate.
Most Wall Street pros currently see sales growth returning next quarter as revenue inches higher by about 3%, although RH is still expected to shrink its business by about 14% for the full 2024 period.
The second half
Investors are hoping to see a modest growth uptick associated with RH's seasonal marketing releases in the late fall and early winter. Looking further out, the company is planning many new gallery openings in 2024 and 2025, both in the U.S. and as part of its international expansion into Europe and Australia.
These launches could lay the foundation for faster sales gains over the coming years, and management's continued push for them is further evidence that it sees a long runway for growth in the luxury home furnishings space.
That path will no doubt have its ups and downs, especially if a recession develops in the U.S. over the next few quarters. But RH can still reasonably target a much bigger annual sales footprint than its current $3 billion level. The bullish thesis also relies on profit margins eventually heading back above 20% of sales.
The price check
If you're considering buying the stock for the long haul, the good news is that its valuation reflects lots of Wall Street pessimism about the next few quarters. Shares are priced at 1.7 times revenue, down from a price-to-sales ratio of nearly 3 this past summer. The P/E ratio has declined to 17 from 31, too.
That's an attractive price for a highly profitable business, even though sales are likely to fall for a second consecutive year in 2024. Once the current cyclical downturn passes, RH will join more diversified retailers like Home Depot in the eventual rebound. But waiting until that recovery has clearly started would mean missing out on some significant stock appreciation gains. If you can stomach that volatility, consider establishing a small position in RH stock today.
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Demitri Kalogeropoulos has positions in Home Depot. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.
