High-End Furniture Maker RH Plunges 17%; Nevertheless, the Stock Still Looks Expensive

Shares of the high-end furniture maker RH (NYSE: RH) dropped 17% on June 14^th after the company reported weak earnings for the quarter ended May 4, 2024 (the first quarter of its fiscal 2024 which ends in early February 2025).  Probably even more damaging than the quarterly results was the tepid guidance the company issued for 2Q FY 2024.

More specifically, RH reported an adjusted loss per share in the just-completed quarter of $0.40, much worse than the consensus forecast for a loss of $0.13, and dramatically worse than a $1.76 per share profit in the year-ago period.  RH’s 1Q FY 2024 sales totaled $726.9 million, about in line with analysts’ estimates, and down about 2% from 1Q FY 2023.

RH management expects 2Q FY 2024 sales to increase 3%-4% on a year-over-basis which represents an improvement from the 2% sales decline in the just-completed quarter, but this projected increase is only about half the 7.5% improvement that analysts were anticipating.

Perhaps even more concerning is RH’s insistence on investing aggressively in its business, including an extensive transformation of the furniture products it is offering, “despite operating in the most challenging housing market in three decades.”  In 2024, it plans to open five new design galleries in North America, one in Brussels, and one in Madrid, Spain.  Four of the seven are already open, including both international locations.  Even more head-scratching, RH is embracing this strategy even though it expects monetary policy “will continue to weigh on the housing market through the second half of 2024 and possibly into 2025.”

RH is maintaining its previously issued forecast that full-year FY 2024 revenue will increase 8% to 10%.  This implies a sales increase of close to 20% in the second half of FY 2024 -- after factoring in negative 2% and positive 3% to 4% in 2Q FY 2024.  Such a torrid 2H FY 2024 sales pace is wildly inconsistent with the company’s own cautious forecast for the housing market.

RH stock has massively underperformed the stock market so far in 2024, declining more than 21% since December 29, 2023.  (Of course, much of this loss traces to its $47 point drop today.)  However, even at its current share price, RH stock does not look cheap.  For the twelve months ended May 4, 2024, RH’s adjusted EPS is $4.25, implying that its P/E based on its most recent twelve months results is an eye-popping 54x.  Even if one were to evaluate RH based on the current analysts’ consensus FY 2024 estimate of $8.82, RH still trades at around 26x earnings, about a 25% premium to the S&P 500.

RH’s cash generating potential is likewise a concern.  Its adjusted free cash flow in FY 2023 was a loss of $251 million.  If one factors in the 1Q FY 2024 results, the company’s free cash flow for the most recently reported twelve months is even worse: negative $314 million.

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