RH Stock Is Beaten Down Now, but It Could 10X

RH (NYSE: RH), like the rest of the home improvement and home furnishings sector, has struggled in recent years.

The stock formerly known as Restoration Hardware soared during the pandemic, but as mortgage rates and inflation spiked in the post-pandemic era, the business cooled off. Since then, President Trump's tariffs have put pressure on the business, and the company has moved nearly all of its production out of China.

As you can see from the chart below, the stock is still down 69% from its peak in 2021, and the rally in late 2024 faded after Trump's tariff regime came into a play.

Given those challenges, RH might seem like an odd pick for a stock that can 10x, but it has the components to get there if the housing market cooperates, as the stock has shown explosive potential in the past. In fact, even after the post-pandemic pullback, RH is still up more than 600% from its 2012 IPO and it was up more than 2,000% at one point, meaning it's already delivered 10x returns to early investors.

Keep reading to see why RH can get there again.

Image source: RH.

Growth in the face of adversity

At a time when growth in the home furnishings sector has been essentially flat due to the sluggish housing market, RH is still delivering solid growth and profits. Revenue increased 9% to $884 million in its third quarter and it reported an adjusted operating margin of 11.6% despite pressure from tariffs and what the company called the worst housing market in nearly 50 years.

The company hasn't been sitting still either. It's launched its brand in Europe and is expanding across the continent with galleries, as it calls its lavish stores, in locales like Paris, London, and Milan, greatly increasing the company's addressable market. It's also dabbling in new lines of luxury business like hotels and restaurants, as well as charter plane and yacht rentals.

RH has a lot of ways to grow, and the housing market is starting to show signs of a recovery with mortgage rates easing. It wouldn't be surprising to see revenue growth return to better than 20% and its profit margin improve in a better macro environment.

Management is underrated

RH CEO Gary Friedman might be considered eccentric, and his shareholder letters don't lack for hyperbole. However, he's proven his mettle over the history of RH and has also proven the doubters wrong before.

In 2016, RH pivoted to a membership model, charging customers an annual fee, now $200, that would get them a discount on merchandise. The move seemed to backfire at first, and the stock plunged. However, customers adjusted to it, and it proved to be a savvy move, locking customers into the brand and creating an incentive to shop there. As sales improved, the stock soared.

Friedman and his management team have also deployed share buybacks wisely, which is often a challenge for publicly traded companies. In 2017, the company repurchased roughly 50% of its shares outstanding when the stock was trading at a discount, and in 2023, it repurchased roughly a quarter of the shares outstanding with the stock down after the pandemic.

That should help set the company up for a recovery and boost earnings per share over the long term.

The path to 10x

RH currently has a market cap of $4.3 billion, meaning it would have to grow to roughly $43 billion to be a ten-bagger, or less with the help of share buybacks.

Even with a premium price-to-earnings ratio, the company would need to reach roughly $1 billion in net income from less than $4 billion in annual revenue currently to get there.

It will take time to get there, but RH could achieve $1 billion in net income on a base of $8 billion in revenue or less, as its luxury business model is built to generate high margins. Its generally accepted accounting principles (GAAP) profit margin approached 20% at one point, and it could get back there with the help of a healthy housing market.

It won't happen overnight, but keep an eye on RH over the next five to ten years. If the company can double its revenue and expand its profit margin back to the high teens, the path to a 10x return is there.

Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.