RH, previously known as Restoration Hardware, has been a contentious stock in the retail industry for quite some time.
The company is led by Gary Friedman, a CEO noted for his flamboyant and exaggerated statements, yet also admired as one of the industry’s most visionary leaders.
RH’s business model is distinctive: it opens expansive galleries to display its luxury furniture and distributes sourcebooks to market its products. The company is also venturing into services, having launched a few guesthouses and restaurants, and leasing a yacht and a jet in an effort to broaden its luxury image beyond just furniture.
Similar to many in the home furnishings sector, RH has faced challenges as the increase in interest rates has cooled the housing market, and the surge in demand experienced during the peak of the COVID-19 pandemic quickly waned.
However, the company’s second-quarter earnings report, released on Thursday, showed signs of recovery. This positive news sent the stock soaring 19% in after-hours trading on Thursday and also lifted peers like Wayfair and Williams-Sonoma, which both saw a 5% increase in the after-hours session.
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RH’s Q2 Performance
RH’s fiscal second quarter, concluding on August 3, indicates ongoing struggles with a sluggish housing market, but the company exceeded forecasts. Revenue climbed 3.6% to $829.7 million, surpassing the anticipated $824.5 million.
Margins, on the other hand, suffered as the gross margin dropped from 47.5% to 45.2%, and selling, general, and administrative expenses increased by 5 percentage points to 33.6%. Consequently, adjusted earnings per share fell from $3.93 to $1.69, though this was still better than the expected $1.56.
These figures highlight how low expectations have become for this sector. RH has also gained popularity among short-sellers, with 25% of its stock sold short.
Given this scenario, a short squeeze might have contributed to the stock’s after-hours rise.
RH’s Future Prospects
In previous earnings announcements, Friedman has criticized the housing market’s dire state, but with potential interest rate reductions on the horizon, he seems to adopt a more optimistic outlook, highlighting recent company investments.
Looking ahead to the third quarter, the company anticipates revenue growth to improve to a range of 7% to 9%, with demand, or order proxy, expected to increase by 12% to 14%. The second quarter marked the company’s first period of positive revenue growth since 2022, and the third-quarter guidance suggests continued upward momentum.
Crucially, product margins are beginning to trend positively, which could restore bottom-line growth for the company.
Are Housing Stocks Set for a Rally?
The rise in RH’s stock is promising for the company as there remains significant room for improvement, and a broader segment of stocks has been left out of the market recovery. Beyond home furnishing retailers like Wayfair and Williams-Sonoma, home improvement giants such as Home Depot and Lowe’s, along with real estate stocks like Redfin, Zillow, and Opendoor Technologies, all appear poised to gain from a housing market revival.
The Federal Reserve is anticipated to start reducing interest rates, which should gradually ease the pressure on the housing market, boosting these stocks. Friedman remains optimistic about assistance from the Fed, stating, “We are the best-positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower.”
Based on the reaction to RH’s report, investors seem eager for positive news from this beleaguered sector. As interest rates begin to decrease, RH and its peers seem like strong contenders to outperform in the upcoming quarters.
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