How Good Has RH Stock Actually Been?

RH (formerly Restoration Hardware) (NYSE: RH) is a leading luxury home goods retailer that experienced strong revenue growth until recently. A weak housing market led to a sharp downturn in the company's revenue. As a result, the stock has lost more than half its value over the last five years, while the S&P 500 index has risen 87% at the time of writing.

With the Federal Reserve expected to continue lowering interest rates over the next year, this is a good time to consider investing in stocks that could benefit from a housing recovery, such as RH.

Here's why RH is particularly attractive right now.

Image source: Getty Images.

What happened to RH

RH's business is clearly not immune to the cyclical nature of the housing market. The company's revenue peaked at $1 billion in the third quarter of 2021 and fell to a low of $727 million by fiscal Q1 2024. But RH has already begun to see a modest recovery. In the most recent quarter, revenue increased to $899 million.

Still, the recovery hasn't helped the stock, which is down 58% year to date. This can be attributed to uncertainty around tariffs and competition, which reduces future visibility in the company's profits. RH reported an operating profit margin of more than 20% before the downturn; however, its operating margin was just 12% on a trailing-12-month basis through the recent quarter.

Focusing on long-term value

Just because a stock has underperformed doesn't mean it's a bad business that is not worth investing in. In the case of RH, nothing has damaged its brand or ability to profitably grow over the long term. This presents a good buying opportunity for investors who can hold the stock for at least five years.

A key catalyst to watch that could send the stock soaring in the years to come is the company's global expansion. It's expanding in Europe, where demand in England has been robust, up 76% in the recent quarter. International expansion will require high upfront costs but could lead to higher profits in the long run.

Furthermore, RH is actively managing selling prices to offset the higher costs resulting from tariffs, which should firm up its margins in the next year or so. Analysts expect its operating margin to climb back to nearly 20% by fiscal 2030. This could translate to 46% compound annual growth in adjusted earnings per share. With the stock trading at a forward (one-year) price-to-earnings ratio of 12.8, RH could offer incredible returns over the next five years.

John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.