Can RH Reach its Lofty Long-Term Expectations?

RH NYSE: RH, formerly known as Restoration Hardware, is set to report its fourth-quarter earnings tomorrow after the bell. The luxury furniture retailer has seen accelerating yoy revenue growth over each of the last two quarters, but Q4 growth is expected to slow to 19.9% yoy from 24.6% yoy in Q3.

The expected slowdown shouldn’t come as much of a surprise because RH derives most of its sales from its physical locations. With COVID-19 cases peaking over the winter, a combination of restrictions and virus-induced fears prevented people from shopping in-person. Moreover, RH warned that supply constraints would limit fourth-quarter revenue growth in its Q3 shareholder letter.

You shouldn’t expect much from RH in its fourth-quarter report. But that doesn’t mean RH is headed for a post-earnings dip. For two reasons:

1. The whisper numbers are probably the same or lower than the published estimates. You can bet that few investors are expecting a strong fourth-quarter performance from RH; the headwinds are obvious.
2. According to RH, the supply constraints should provide an “$80 to $100 million positive impact to revenue growth in 2020.” It’s not like RH is going to lose all of those potential sales.

All that said, it’s unlikely that RH shares will soar immediately after earnings – or over the next couple of months. But shares could have a lot of upside in the long-term.

Management Has High Hopes for 2021

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 Over the last year, you may have heard, there has been a remote working boom. At first, there was fear that workers wouldn’t be as productive from home. But companies have realized that their employees can, in fact, fulfill their duties from the comfort of their own homes.

As a result, many companies have signaled that their employees will be able to continue working from home post-pandemic. With city-living increasingly unappealing of late, thousands of workers have decided to relocate to the suburbs.

How does RH factor into all of this?

All of those new homeowners need new furniture. And this tailwind isn’t going away anytime soon. Consider that a) the mass migration to the suburbs is going to continue as more and more companies unveil their long-term remote work plans and b) furnishing a new home isn’t something that happens overnight.

Alright, now it’s time to get to those lofty long-term expectations.

 In the third quarter shareholder letter, RH management raised eyebrows when it talked about its view of the next decade:

“At a compounded annual growth rate of 10% to 15%, we would generate annual revenues of $7.4 to $11.5 billion. If you assume an adjusted operating margin in the mid-twenties and a continued expansion of our valuation multiples, our market value could be $50 to $70 billion in 2030, or roughly 6 to 8 times our current value.”

Management pointed to “multiple new growth initiatives in the pipeline, including new collections, new concepts, new galleries, new guesthouses, and new businesses” as growth drivers moving forward.

Is this pie-in-the-sky company speak or is there a realistic chance that RH sees revenue grow by a double-digit CAGR over the next ten years?

Probably somewhere in between. The growth initiatives, relocation tailwind, and track record predict strong future growth for RH.

At the same time, nobody can predict the future. Analysts have a hard enough time projecting the next 10 months, let alone the next 10 years.

How Should You Play RH?

RH shares are currently changing hands at 27.4x forward earnings, so you don’t need to be fully confident in the long-term forecast to purchase shares. If revenue grows at a CAGR of, say, 8% over the next decade, shares would trade much higher than they are today.

RH shares hit all-time highs yesterday, and are currently riding a five-session winning streak. High volume indicates that there is strong demand for shares.

The bullish price action and long-term upside make RH an attractive proposition ahead of earnings – even though the bulk of the upside may not come in the near future.