Luxury furniture company RH (RH -2.72%) picked a bad day to report earnings, with its shares plunging 40% the following session as it coincided with President Donald Trump’s “Liberation Day” tariff announcements. The stock continued to tumble the next day after China announced retaliatory tariffs and is now down more than 60% year to date, and it’s only April.
Let’s take a close look at the company’s recent results to see whether it’s time to scoop up shares.
A tough market for furniture
On RH’s fiscal fourth quarter earnings call, CEO Gary Friedman said the company has been operating in “the worst housing market in almost 50 years.” He also said he expects the company to operate in a higher-risk environment this year due to tariffs, market volatility, and inflation.
The home furnishing market saw a lot of demand pull forward due to COVID-19, when people spent more time at home. Meanwhile, with the rise in interest rates, there has been a lot less home movement and remodeling, which are when people often look to buy new furniture.
At the same time, the company is in the middle of an aggressive European expansion strategy. It’s not just testing out these markets but also building massive, elaborate showrooms in expensive locales. It currently has galleries in England (Aynho Park), Germany (Munich and Düsseldorf), Spain (Madrid), and Belgium (Brussels) and plans to open new ones in London and Paris this year. Its first European gallery was built on a 73-acre, 60-room estate in the countryside 75 miles from London.
Given their size, location, and grandiosity, RH’s galleries are quite expensive to develop. These are often not your typical store openings. RH likes to make statements with its real estate locations. For example, its Boston location was built inside the city’s former museum of natural history, and it has a massive 97,000-square-foot location in Newport Beach, California.
This company has been an aggressive buyer of its stock in the past, which has saddled it with $2.6 billion in debt. Its leverage (debt/adjusted earnings before interest, taxes, depreciation, or amortization, or EBITDA) was 4.8 times at the end of its fiscal year. That raises the stakes for the company.
Meanwhile, RH sources most of its furniture from Asia, the region seeing the biggest tariff increases. That would significantly raise the prices of RH’s already quite pricey furniture. It is looking to have 14% of its total production come from the U.S. by year-end.
The results themselves were solid in isolation but did miss expectations. Quarterly revenue rose nearly 10% to $812 million, while adjusted earnings per share (EPS) more than doubled to $1.58. Analysts, however, were looking for EPS of $1.09 on sales of $830 million.
Gross margins were solid, up 120 basis points to 44.7%, though SG&A (selling, general, and administrative) expenses rose 14% and were 36% of sales, compared to 34.8% of sales last year.
Merchandise inventories jumped 35% to $1 billion. Inventory growth far outpacing sales growth would typically be a red flag, although the company argued that being inventory-heavy was a positive with the tariffs. Whether this is true will largely depend on the newness of that inventory or whether it will lead to future discounting if it sits.
Looking ahead, the company forecasts full-year revenue growth of between 10% and 13% and Q1 revenue growth of between 12.5% and 13.5%.
Image source: Getty Images.
Is it time to buy the stock?
For a valuation perspective, RH trades at a forward price-to-earnings ratio (P/E)Â of only 14 times current fiscal year analyst estimates. That’s pretty inexpensive for a company expected to grow its revenue by double digits next year.
However, tariffs could have a big impact on the “E” part of its forward P/E equation. Tariffs will make its premium-priced furniture much more expensive, while there is also the potential for a recession. The company caters to a wealthier clientele, but even higher-income households have budgets and sometimes cut spending during periods of economics weakness.
Meanwhile, the company already carries some pretty hefty leverage, and its EBITDA could come under pressure if its sales struggle. RH already had negative free cash flow last year. Given the size and grandiose nature of its stores, it also has some pretty hefty lease expenses.
While RH looks attractive due to its valuation and potential, it also carries some significant risks. As such, I don’t consider it a must-buy, but I think interested investors could consider a small position in the stock right now.
