Luxury furniture company rh(NYSE: RH) It coincided with President Donald Trump’s “liberation day,” and the next session saw a 40% stock surge and chose a bad day to report revenue. Customs announcement. After China announced retaliatory tariffs, stock prices continued to fall the next day, and now it’s down more than 60%, only in April.
Let’s take a closer look at the company’s recent results to see if it’s time to scoop the stock.
In RH’s fourth quarter revenue call, CEO Gary Friedman said the company is operating in “the worst housing market in almost 50 years.” He also said he hopes the company will operate in a higher risk environment this year due to tariffs, market volatility and inflation.
In the residential furniture market, a lot of demand has moved forward due to Covid-19 when people spent more time at home. Meanwhile, rising interest rates have resulted in much less movement and modifications in homes when people often buy new furniture.
At the same time, the company is in the midst of an aggressive European expansion strategy. Not only are they testing these markets, they also build large, elaborate showrooms in expensive regions. Currently, there are galleries (Einhopark), Germany (Munich and Dusseldorf), Spain (Madrid) and Belgium (Brussels) in the UK, and new ones will be opening in London and Paris this year. The first European gallery was built on a 73-acre, 60-room property in the countryside 75 miles from London.
Given the size, location and grandeur, the gallery at RH is extremely expensive to develop. Often these are not your typical store openings. RH likes to make statements at real estate locations. For example, the Boston location is built within the city’s former Natural History Museum, with a massive 97,000 square feet in Newport Beach, California.
The company has been an active buyer of stocks in the past, adding it with a debt of $2.6 billion. That leverage (debt/adjusted) Earnings before interest, tax, depreciation, or amortization, or EBITDA) It was 4.8 times the end of the fiscal year. It increases the company’s interests.
Meanwhile, RH sources most of its Asian furniture, and the region has seen its largest tariff rise. It would significantly raise the prices of RH’s already very expensive furniture. 14% of total production is aiming to come from the US by the end of the year.
The results themselves were isolated and strong, but I missed out on hopes. Quarterly revenues rose nearly 10% to $812 million, but earnings per share (EPS) more than doubled to $1.58. However, analysts were looking for an EPS of $1.09 with revenue of $830 million.
The total margin was strong, rising 120 basis points to 44.7%, while SG&A (Sales, General, and Administrative) costs increased 14%, at 36% of sales, compared to 34.8% of last year’s sales.
Product inventory has gone from 35% to $1 billion. Stock growth will usually be far outweigh sales growth, but the company has argued that high inventory is positive for tariffs. Whether this is true depends heavily on how new it is in stock. It depends on whether it leads to future discounts if it is sitting.
Looking ahead, the company forecasts annual revenue growth to 10%-13% and 13.5% revenue growth in the first quarter from 12.5% to 13.5%.
Image source: Getty Images.
From an valuation perspective, RH trades at a positive price and return rate (P/E) only 14 times the current fiscal year analyst estimate. This is pretty cheap for companies that are expected to increase revenue by double digits next year.
However, tariffs can have a significant impact on the “E” part of its forward P/E equation. Tariffs make premium-priced furniture much more expensive, but there is also the possibility of a recession. The company caters to wealthy clients, but even high-income households have budgets and sometimes cut spending during periods of economic debilitating.
Meanwhile, the company already has quite a lot of leverage, and EBITDA could be under pressure if there is a sales struggle. RH already had negative free cash flow last year. Given the size and grand nature of the store, there are also quite a lot of lease costs.
While RH looks attractive due to its evaluation and potential, it also poses some significant risks. Thus, I don’t think it’s a must-see, but I think that interested investors can now consider small positions in stocks.
Consider this before purchasing inventory on RH.
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