Warren Buffet Loves This Home Store

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Warren Buffett is arguably the greatest investor of our time. 

When he buys a company, he intends to hold it for years. For example, he bought shares of Coca-Cola (KO) in 1988 and is still holding them. 

About three years ago, he bought shares of Restoration Hardware (RH). In May, he increased his size.

That helped propel interest to a multi-month high amongst financial professionals looking into home furnishings and improvement stores.

In fact, it just missed hitting the #2 spot 

The stock is currently down more than 50%, but does that make it a worthwhile buy, or is there more pain to come?

RH’s Business

RH(RH) offers interior design services and sells luxury furniture through its membership program. 

The company operates the following segments: RH, Waterworks, and Real Estate Development. RH and Waterworks include all sales channels accessed by its customers. 

The Real Estate Development segment holds the company’s real estate investments. 

For example, in 2021, the firm announced an equity investment of $105 million in connection with real estate development initiatives in Aspen, Colorado. The investment included properties developed into retail locations, hospitality concepts, residential developments, and workforce housing projects.  

In the latest earnings, the company beat expectations. However, management highlighted slower home sales as a concern for the upcoming quarters.

Financials

RH has been consistently growing its revenues year after year. 

From 2016 to 2021, revenues grew by 76%. Its 12-month trailing revenues currently stand at $3.86 billion, with the firm on pace for another record-breaking revenue year. Based on its most recent quarter, RH has $2.24 billion in total cash and total debt of $3.6 billion. However, the company has sound financials, with a current ratio of 2.5x. 

Valuation 

RH trades at a P/E GAAP of 9.3x, which is significantly lower than the average stock in the S&P 500. 

That’s partly due to the massive sell-off the stock has experienced in 2022, as shares are down more than 50% YTD. Last year, RH was trading at a P/E ratio of 40x. 

The firm trades at a price-to-sales ratio of 1.5x, notably lower than its 5-year average of 1.99x. 

Plus, its price to cash flow ratios are excellent at 11.57x for the past year and 8.93x looking forward.

Profitability 

RH operates at a gross profit margin of 51.3%, which is better than most of its competitors, Haverty Furniture (HVT) at 57.5%, Wayfair (W) at 27.3%, and Bed Bath & Beyond (BBBY) at 31%. 

At an EBITDA margin of 28.2%, RH is head and shoulders above its competitors, HVT at 13.2%, BBBY at -1.2%, and W at -5.8%.  RH has a return on equity of 64.5%, notably better than BBBY at -195%, HVT at 32.2%, and W at N/A.

Growth

RH has grown revenues by 10% (YoY), which is significantly stronger than its competitors, BBBY at -25%, HVT at 7.74%, and W at -14.7%.   

It’s also maintained an impressive 5-year average growth rate of 10.77%, only second to W.

Our Opinion 9/10

RH operates at extremely attractive margins and has consistently posted strong profits. Rising interest rates are negative for the housing market, which could spill over into RH’s business. 

However, shares are already down 50%, and the company is the absolute best at luxury home goods, design, and furniture. If there is one thing we’ve learned about the housing market, it eventually comes back. We believe RH is trading at a reasonable P/E ratio, and now is the time to start getting into the stock, as it should be a winner for many years.