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After a record 2019, how far can RH’s share price go?

RH’s share price saw over 80% gains in 2019, wooing Warren Buffett’s Berkshire Hathaway into buying 1.2 million shares in November. How does 2020 look for this stellar growth stock?

RH [RH], previously known as Restoration Hardware, had an impressive 2019. The upscale furniture retailer’s share price started the year at $117.66 and closed it at $213.50, reaching an all-time high price of $243.67 shortly after the release of its Q3 earnings in December. 

The release reported that earnings per share were $2.79 for the quarter – higher than the $2.22 per share predicted by the Zacks Consensus Estimate. During the same quarter in 2018, RH posted $1.73 EPS. 

 

 

 

Meanwhile, net revenue increased by around 6% to $676.72m from $638.51m in the same quarter the previous year. This figure was slightly higher than the consensus revenue of $676m forecast by analysts. 

Despite the strong performance, 2019 wasn’t without bumps. RH’s share price dropped to a then-52-week low of $84.11 in May. It had slumped 20.2% throughout that whole of the month, as it struggled to recover from its mixed Q4 2018 results, delivered in March. In a statement, the company’s management had said that “market volatility and negative trends in high-end housing” were partly to blame for the drop. 

 

A bold move paying off

At a time when reportedly fewer buyers have been purchasing high-end properties and apartments, RH has been confident that the tide will turn and is doubling down on its commitment to physical stores. 

This could be seen as a risky strategy, especially given that the majority of retailers are turning their backs on brick-and-mortar – closing stores, reducing floorspace and, in some cases, adopting a digital-only approach. However, RH believes that high-street retail is about more than purchasing products. It’s about delivering an experience that can’t be replicated online. Since 2014, RH has opened more than 70 museum-style stores (it refers to them as galleries) across Canada and the US.

The bold move appears to be paying off. RH announced in the Q3 release that it plans to open in more locations at a rate of five to seven a year, while it has also identified overseas markets – it’s hoping to soon complete five to seven real estate transactions across Europe – as the largest opportunity for growth that will help to position RH as a $20bn global brand. It’s looking to launch RH International in 2021 or 2022.

“Our dominant physical presence combined with our integrated multi-channel platform that generates over a billion dollars online will continue to enable the RH brand to disrupt the highly fragmented luxury home furnishings market and take share for years to come,” said RH’s CEO Gary Friedman in a prepared statement.

“Our dominant physical presence combined with our integrated multi-channel platform that generates over a billion dollars online will continue to enable the RH brand to disrupt the highly fragmented luxury home furnishings market and take share for years to come” - RH’s CEO Gary Friedman

 

The global luxury furniture market was worth $25bn in 2018 and is set to grow at a compound annual growth rate of 3.8% between 2019 and 2024, reaching a value of $31bn, according to data from Research and Markets. RH is likely to be a leading name in luxury furniture and home goods due to the fact that, in the CEO’s own words, the company is “a brand with no peers”. 

 

A buoyant outlook

Looking ahead, analysts believe that RH is one of the companies to watch and is well-positioned for future earnings growth. 

RH’s fourth quarter is expected to see revenue of between $703m and $711.5m. For the full fiscal year, RH expects to post earnings of $11.58-$11.70 per share on $2.68bn-$2.69bn in revenue. And for the fiscal year ending in 2020, the company is forecasting $12.61 EPS on revenue of $2.9bn, a year-on-year change of 13.5% and 7.9% respectively. Its long-term targets include increasing net revenue growth by between 8% and 12%. 

Now could be an ideal time to invest in RH. In November, Warren Buffett’s Berkshire Hathaway bought roughly 1.2 million shares (valued at $267.94m, as of 16 January). The share price rose 7.5% in after-hours trading following the announcement.

 

Market Cap$4.252bn
PE ratio (TTM)27.94
EPS (TTM)7.99
Quarterly Revenue Growth (YoY)6.40%

Restoration Hardware share price vitals, Yahoo Finance, 22 January 2020

 

Thanks in part to Buffett’s purchase, confidence in RH is continuing to increase. Andrew Left of Citron Research has suggested that RH could even be an acquisition target in 2020, if not for Buffett’s Berkshire Hathaway, then Amazon or LVMH. The latter acquired luxury jeweller Tiffany & Co for $16.2bn last November - despite its slow growth - and is expected to turn the business around.

A potential purchase of RH would be a much more lucrative deal, according to Left. "If tomorrow we applied the Tiffany & Co takeout multiple to RH, the stock would trade at $350," he suggests.

As of the second week of January, the current consensus among investment analysts polled by CNN is to hold stock in RH. Of the 21 analysts, 1 rates it as underperform, 12 hold, and the other eight rate it a buy.

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