|
Proprietary Data Insights Financial Pros’ Top Home Furnishing Stocks Searches in the Last Month
|
||||||||||||||||||||||||||||
Financial Pros Can’t Figure Out This Stock |
Investors don’t like earnings that miss estimates. Yet, Restoration Hardware (RH) bucked the trend when its stock climbed despite significantly missing earnings and revenue estimates. Financial pros who searched out this stock in earnest, according to our TrackStar data, wanted to understand why. Analysts noted the CEO’s rosy outlook, including “demand trends to accelerate through 2024.” Some brushed off the latest miss as a one-off driven by weather and conflicts in the Red Sea, combining to create a $40 million headwind. Yet, management also said adverse conditions would continue in the near term. Given the stock’s recent run, we wanted to find out whether Restoration Hardware was worth adding to your portfolio. Restoration Hardware’s Business Restoration Hardware has redefined luxury home furnishings. Known for its expansive growth from hardware to a comprehensive lifestyle brand, the company stands out with its curated aspirational lifestyle and design galleries that blend artistic installations with traditional retail spaces. Restoration Hardware caters to the upscale home market through its unparalleled design, quality, and value in furniture, lighting, textiles, and décor. Operating 70 retail galleries and 14 Waterworks showrooms, the company provides an immersive shopping experience, offering more than just products—it sells a lifestyle. Restoration Hardware segments its business into the following areas: Restoration Hardware (95% of revenues): The company’s namesake showrooms showcase the company’s luxury home furnishings and products. WaterWorks (5% of revenues): An acquired brand that features high-quality bath and kitchen fittings, fixtures, furniture, accessories, lighting hardware, and surfaces. Although the company’s recent quarterly report wasn’t great, analysts focused on plans to expand the company’s footprint internationally into the UK, Europe, and Australia. Furthermore, the revenue lag is expected to lead to an increased backlog due to the ongoing product transformations. This transformation is taking the company from a promotional to a membership with a completely revamped home delivery and customer experience. The efforts are expected to take several years, dramatically improve customer experience, enhance margins, and lead to substantial cost savings. Financials
Source: Stock Analysis Restoration Hardware’s stock soared in 2021 as revenues grew over 30%, the first double-digit YoY increase since 2017. However, the last two years have seen sales slide back to where they were between 2020 and 2021. Margins have also taken a hit as the company works through its multi-year transformation efforts. These initiatives have led to an increase in Capex in excess of operating cash flow. Yet, the company carried over an enormous amount of cash from last year, which it used to fund the operations and buy back shares. Currently, Restoration Hardware has $3.7 billion in debt while generating between $200 and $400 million in cash from operations. Valuation
Source: Seeking Alpha As margins have compressed, so have Restoration Hardware’s earnings. Its stock trades at a hefty 58.9x trailing earnings, 48.7x forward earnings, and 31.5x operating cash flow. That’s far more than any of its peers, even Wayfair (W), which trades at 23.4x operating cash flow. Growth
Source: Seeking Alpha With the exception of Lovesac (LOVE), each of the home furnishing retailers saw sales declines YoY. And all except Lovesac and Wayfair expect that to continue into next year. None of this seems to support the high valuation for Restoration Hardware. Profitability
Source: Seeking Alpha Despite the recent decline in margins, Restoration Hardware runs the second best gross, EBIT, and net income margins of the group. However, its negative free cash flow margin is concerning. Our Opinion 5/10 Restoration Hardware has a lot of moving parts. First, you have the underlying softness in the home furnishings market. Coupled with the company’s transformation, it’s not clear where the business will end up. At the moment, we’re not interested in paying for high growth that’s uncertain. If and when things turn we’d give the stock a second look. |
|
News & Insights |
Just Spilled |
|
|
Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here |