RH’s stock price has taken a beating over the past six months, shedding 51.5% of its value and falling to $184.13 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in RH, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is RH Not Exciting?
Even though the stock has become cheaper, we're swiping left on RH for now. Here are three reasons why there are better opportunities than RH and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
RH’s demand has been shrinking over the last two years as its same-store sales have averaged 5.2% annual declines.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for RH, its EPS declined by 14.3% annually over the last five years while its revenue grew by 3.7%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
RH burned through $213.7 million of cash over the last year, and its $3.89 billion of debt exceeds the $30.41 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the RH’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of RH until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
RH isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 14.6× forward P/E (or $184.13 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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