Restoration Hardware, RH Stock: Buy After Earnings Drop?

Key Points

• Restoration Hardware's (RH) stock price fell after releasing earnings on June 13, 2024.
• RH is pursuing an aggressive strategy to invest in the firm and elevate its brand.
• Analysts remain bullish on the stock, although a significant range in price targets exists.

RH NYSE: RH, once known as Restoration Hardware, is a high-end home furnishing retailer. The firm's shares plummeted after it missed analysts' consensus estimates on first-quarter earnings last Thursday, June 13, 2024. It reported an earnings-per-share (EPS) of negative $0.40, compared to an estimate of negative $0.08. As a result, by the end of trading on Friday, the share price had fallen by nearly 20%. Despite these disappointing results, several analysts at Bank of America and Wells Fargo remain bullish on the stock. Even after a broad lowering of price targets, some analysts still see a 40% upside. So, is now the perfect time to buy the dip?

RH's Vision: Becoming a Global Leader in Interior Design

When investigating the firm’s financial results and the context provided by executives, it becomes more apparent why some analysts are holding on to their bullish rating on the stock. RH is currently pursuing an aggressive strategy to elevate the reputation of its brand by making significant investments in areas it believes can drive long-term growth. In short, RH wants to position itself as the global thought leader in the interior design space. It wants to do this by creating an overall luxury experience around its product that involves more than just purchasing furniture. This long-term strategy and falling home sales have been pushing down short-term results.

In the firm’s Q1 2024 financial results and shareholder letter, Chairman and CEO Gary Friedman described the firm’s current investment activities as “the most prolific product transformation and platform expansion” in the firm’s history. He argues that the firm continues to build momentum “despite operating in the most challenging housing market in three decades.”

RH Design Galleries: Creating Unique Brand Identity

One way that RH is pursuing this vision is by expanding its “Design Galleries.” These are massive complexes, often over 50,000 square feet, and sometimes located in historic buildings. They are covered in stunning architectural and interior design displays and can include RH Interior Design Offices, restaurants, and wine bars. RH believes investing in these locations is essential in pursuing its “brand elevation” goal, allowing the firm to create a truly unique brand identity. RH plans to open one of these galleries in every “major market” and believes they can generate revenues of “$5 to $6 billion in North America, and $20 to $25 billion globally.”

The firm also plans to enter the vast housing market with RH Residences, which are fully furnished luxury living spaces that surpass ordinary homes. It is even venturing into the travel industry, building a customized yacht that can be chartered in the Mediterranean and the Caribbean for $140,000 per week.

The firm's financial statements show its commitment to ongoing investment and expansion of its offerings. The firm nearly doubled its capital expenditures in Q1 2024 versus Q1 2023, from $34 million to $66 million. Between 2022 and 2023, RH increased its capital expenditures by $150 million compared to the period from 2020 to 2021.

Analyst Opinions on RH's Bold Strategy: Diverse Price Targets

RH’s strategy is certainly ambitious, making it exciting but also risky. RH wants to become the premier interior design name and cater to very wealthy individuals. If successful, the firm could become an industry leader. It may even be able to provide some recession-proofing to the business. The wealthy also cut spending when times get tough, but they start from a much larger base of disposable income. This means they can keep spending on non-necessities in a bad economy. On the other hand, if RH’s high-ticket investments don’t translate into the brand identity they want, they will have wasted significant time and resources and may have to develop a new overall strategy. 

Analyst price targets vary widely, reflecting differing opinions on this strategy. Wells Fargo holds a target of $350, implying an upside of 59%, while Goldman Sachs thinks the stock is fairly valued, with a target of $226. The average price target by analysts covering the firm lies at $310, representing an approximately 40% upside. Only time will tell whether RH’s ambitious plan will prove successful.