When we consider which stocks have benefitted from market trends caused by the pandemic, usually the first ones that come to mind are cloud-based software companies, e-commerce companies, and any of the “stay-at-home” stocks. On the other hand, the brick-and-mortar retail industry has really been suffering lately thanks to store closures and an uncertain economy. That’s why it’s so surprising to see one brick-and-mortar retail stock that is up over 86% year-to-date.
This is the case with Restoration Hardware (NYSE:RH), a retailer in the luxury home furnishings marketplace. It’s a stock that has been flying under the radar for many investors this year and continues to surpass expectations. Keep reading below to learn more about RH and why it could be in for more upside going forward.
Luxury Home Goods Supplier Providing Experiential Shopping
You can always learn a lot about a company simply based on what its target market is like. With RH, you have a luxury home goods supplier that caters to people who are willing to invest a lot in their homes. The company was formally known as Restoration Hardware, but it has undergone a dramatic transformation after implementing a strategic focus on building its brand. RH sells upscale home furnishings such as furniture, lighting, bathware, textiles, and décor through its retail stores, catalogs, and online e-commerce platform. What’s clear about RH is that it really understands how to connect with its target clientele.
When someone walks into one of the RH galleries, it’s not just an average shopping day, it’s an experience. The company has concentrated on creating showrooms that are unique and cater to the wealthiest clientele. They are usually massive physical locations that display collections of the company’s products in eye-catching and aesthetically pleasing ways. Some of the galleries are even located in historic landmarks. RH is also updating many of its physical locations with things like restaurants and cafes. Customers can even charter a ride on the company’s yacht, RH3. The RH brand is one-of-a-kind and difficult for competitors to replicate, which is part of the reason why it has attracted major investors including Warren Buffett’s Berkshire Hathaway (NYSE:BRKa).
Resilience During the Pandemic
Arguably one of the strongest competitive advantages of RH is its unique shopping experience, which makes it all the more impressive that the stock has performed so well during the pandemic with many of its stores closed for a portion of the year. With many people stuck at home thanks to stay-at-home measures and safety concerns, companies that provide home goods are seeing elevated demand for their products. It’s the perfect time for consumers to invest in furnishings that will make their time spent at home more comfortable.
There’s also the fact that since RH caters to a luxury market, its customers are wealthy and typically won’t cut spending during periods of economic uncertainty. Finally, the residential real estate market has been hot this year thanks to record-low mortgage rates, which can correlate to increased spending at stores like RH. This trend should continue in the near term and is another great reason to consider adding shares of RH.
Q2 Earnings Takeaways
While RH is certainly dealing with some issues related to the pandemic, most notably including supply chain issues and store closures, its Q2 earnings were impressive and confirm that it is a business that is holding up well despite the challenges it faces. The company was able to double Free Cash Flow year-over-year in Q2 to total $218 million and saw Q2 Adjusted EPS rise by 53% year-over-year to $4.90. RH also was able to increase its Revenue figure slightly during Q2 from the same period a year ago, which is notable since many major brick-and-mortar retailers are seeing double-digit revenue declines this year.
Perhaps the most important takeaway from the Q2 earnings report for RH was the fact that the company achieved a record adjusted operating margin of 21.8% despite a revenue figure that was basically flat. The company’s management is projecting adjusted operating margins in the low to mid-twenties over the long term, which is very attractive for a retailer. RH is expected to report its Q3 earnings on 12/3, so make sure to look into the results for confirmation that RH can continue its positive momentum.
Final Thoughts
RH is a company that has created a memorable brand and a unique customer experience. It is certainly an intriguing investment prospect at this time, especially once the pandemic is under control and people are able to shop freely again in the company’s galleries. With ambitions of international expansion and several market trends working in the its favor, RH could be a great long-term buy if the stock pulls back to provide an attractive entry.