1 Stock That Could Soar When the Housing Market Recovers

Follow by Email
Visit Us
Follow Me

Talk to any real estate agent, and you’ll likely hear the same thing. The housing market is as slow as it has been in a long time.

The pandemic-driven housing boom has dried up with mortgage rates at their highest levels in 20 years and existing home sales as low as they’ve been since the early 2010s when that era’s real estate bubble went bust.

Americans are reluctant to sell their homes and move, contributing to a lack of inventory on the market. That has posed challenges for a slew of companies, including real estate brokerages, home improvement retailers, property tech companies, and others.

Among the companies caught in the crossfire is RH (RH 2.02%), the high-end home furnishings company formerly known as Restoration Hardware. Like other home furnishings retailers, RH boomed during the pandemic, but since then, sales and profits have taken a dive.

In its fiscal 2023 second-quarter earnings report, RH’s revenue fell 19% year over year to $800.5 million, which was still ahead of the analysts’ consensus at $779.1 million. On the bottom line, adjusted earnings per share tumbled from $6.12 in the year-ago quarter to $3.93, though that also topped the consensus at $2.53.

Echoing the company’s peers that are also exposed to the housing market, CEO Gary Friedman said, “We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook is for rates to remain unchanged until the second quarter of 2024.”

Guidance for the current quarter was also weaker than expected, contributing to the stock’s double-digit slide last week.

While there’s no question RH is facing challenges, the sell-off offers a good chance to buy a winning stock experiencing temporary weakness. Here’s why.

The business is inflecting

Based on the company’s guidance, the worst of its slowdown may be behind it. The company called for revenue of $740 million to $760 million during the seasonally weaker fiscal third quarter. That represents a 14% decline (at the midpoint of the range), a small improvement from the previous quarter.

Its fourth-quarter guidance, meanwhile, implies a 1% increase in revenue (at the midpoint).

Management itself said it’s seen a strong early response to its RH Interiors sourcebook, which went out later than normal, and it said it expected “business trends to inflect in the second half of the year” as it sends out the RH Contemporary and RH Modern sourcebooks.

The company also predicted its new product assortment would help it gain market share next year.

The brand diversification

CEO Gary Friedman is known for taking risks, and one of his boldest bets yet has been taking RH from a high-end home furnishings company to a luxury lifestyle brand, which includes hotels, restaurants, and chartered planes and yachts, in addition to expanding to Europe.

Management said its opening of RH England received more press coverage than any previous gallery opening, and it has several more openings planned for Europe and Australia in the next two years.

It also said it saw an opportunity to drive growth with the opening of smaller design studios in wealthy enclaves, and it continues to move forward with brand expansion like RH Couture and RH Bespoke, serving the interior design industry directly.

Savvy financial management

RH left little doubt that it believes the stock is undervalued as the company repurchased $1.2 billion last quarter, retiring 17% of shares outstanding and deploying most of its cash balance. That move will make earnings significantly more valuable to shareholders in any housing recovery.

While the timing of any recovery is unclear, the Fed itself has forecasted the benchmark federal funds rate to fall back down to around 2.5% over the next few years, implying some relief for mortgage rates and the housing market.

RH should be among the beneficiaries when it does, and the company has already proven it has a high-margin business model and the ability to take advantage of upscale demand for home furnishings.

Don’t expect the stock to be down forever. Over the next five years, RH looks like a good bet to outperform as market conditions improve.


This article was originally published on this site