RH’s Transformation Pay Off Will Accelerate with Rate Cuts

Key Points

• RH, formerly known as Restoration Hardware, surprised investors with a Q2 2024 top and bottom line beat, indicating the worst may be over as demand picks up.
• RH had its first positive year-over-year (YoY) quarterly earnings growth after falling for 7 straight quarters.
• The Fed interest rate cut cycle should improve the home buying environment, which should improve furniture sales.

Formerly known as Restoration Hardware, RH NYSE: RH is a high-end home furnishings retailer offering curated collections of luxury furniture, decor, bathware and textiles. Its stock surged 25% following its second-quarter 2024 earnings release. The reaction didn't stem from a blowout earnings report but was rather a relief reaction that the worst may be over, and growth is returning to the company, further fueled by a healthy 13.03% short interest.

The Tea Leaves Braced Investors for the Worst

Analysts and investors were expecting the worst heading into RH’s earnings report, especially after its competitors sounded alarms in their respective earnings reports. They indicated that even the luxury consumer discretionary sector retailers were not immune to tightening consumer budgets.

Wayfair Inc. NYSE: W commented that consumer spending was still cautious in its second quarter. Williams-Sonoma Inc. NYSE: WSM lowered its fiscal 2025 comp and revenue guidance due to stubborn economic headwinds. La-Z-Boy Inc. NYSE: LZB had issued lowered third-quarter 2024 guidance. RH investors were going into Q2 2024 earnings with low expectations, as the company had previously reported 7 straight quarters of lower year-over-year (YoY) revenues.

RH May Have Weathered the Storm

RH reported its first YoY positive sales growth in 2 years. The company reported EPS of $1.69, beating analyst expectations of $1.56 by 13 cents. Revenues finally saw growth of 3.6% YoY to $829.66 million, beating consensus estimates for $824.52 million. Adjusted operating margin was 11.7%, and adjusted EBITDA margin was 17.2%.

The Darkest Before a New Dawn

Demand was up 7% in Q2 2024 and continued to inflect positive as it gained each month to finish July up 10%. This was actually below RH’s forecast of 8% to 10% demand growth in the quarter. The momentum carried into the start of Q3 2024, as August saw demand rise 12% YoY with product margins inflecting positive. RH raised its demand forecast to improve 12% to 14% in Q3 2024. RH stated this was the most challenging housing market in 3 decades.

RH’s Strategic Pivot Into The Eye of the Storm

In the face of this challenge, RH decided to aggressively invest and expand in the downturn, which had a short-term impact on results but set the company on a path to gain market share in North America while building the foundation for long-term growth in Europe, Australia and the Middle East for the next decade.

However, in Q2 2024, charging into the eye of the storm resulted in a 10-point contraction in adjusted operating margins to 11.7%. RH is opening new galleries and is looking to launch a 3,000-square-foot Waterworks Showroom in Newport Beach, California, by the fourth quarter. Its 90,00 square foot 4-story Newport Beach RH will open in November 2024.

RH plans to develop a Sourcebook with test mailing scheduled for 2025. It expects Waterworks Showroom, which it acquired in 2016, to grow 500% of its current revenue to be a $1 billion brand.

RH continues its expansion in Europe with plans to launch in Paris and Milan within the next 2 years. Continued investments will weigh in on margins in the near term, and the company projects 11% to 12% adjusted operating margins for fiscal full year 2025, which is down 3.5% from previous forecasts. 

RH Issued In-Line Guidance

Due to the uncertain economic climate, RH lowered its full-year 2025 revenue growth projection to 5% to 7%, down from its 8% to 10% previous forecast. This equates to $3.18 to $3.24 billion versus $3.19 billion consensus analyst estimates. They expect to end the year with an increased backlog of $80 million to $100 million. Investments and startup costs to support international expansion are expected to have a 240 bps drag for 2024.

RH CEO Gary Friedman cautioned, “Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout fiscal 2024 and into 2025.”

Friedman continued, “Due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately 4 to 8 points until we read and react to the new collections, reduce backorders and shorten special order lead times.”

RH Stock Triggered a Symmetrical Triangle Breakout Pattern

A symmetrical triangle is comprised of 2 converging trendlines. The descending upper trendline resistance is formed by connecting the lower highs. The ascending lower trendline support is formed by connecting higher lows. As the stock edges closer to the apex point, a breakout through the upper falling trendline or breakdown below the lower rising trendline imminently ensues.

RH's upper descending trendline formed at the $299.26 swing high, and the ascending lower trendline formed at the $212.50 swing low. RH tested the symmetrical triangle three times before gapping higher following its Q2 2024 earnings release. The daily relative strength index (RSI) is curling back up at the 56-band. Fibonacci (Fib) pullback support levels are at $301.60, $278.88, $261.97 and $237.97.

RH’s consensus analyst price target is $313.08, with its highest analyst price target at $359.00.  

Actionable Options Strategies: Bullish investors can consider using cash-secured puts at the Fib pullback support levels to buy the dip. If assigned the shares, then writing covered call at upside Fib levels executes a wheel strategy for income since there is no dividend.

Bullish options investors can minimize downside risk while benefitting from potential stock price gains using less capital than owning the stock by implementing a bullish call debit spread.