Is this home furnishing play a buy?

It’s time to break down a popular cyclical. Here is the break down of $RH, otherwise known as RH or Restoration Hardware.

Current Price: $623.31

52/Wk High: $733.05

52/Wk Low: $226.82

Market Cap: $13.1 Billion

Read below for the break down!

RH ($RH) is a popular retailer within the home furnishings industry, boasting a simple online shopping platform and a vast array of locations across the country.

RH was previously Restoration Hardware and has been a common housing related cyclical on the public markets since the company’s 2012 IPO.

The company insofar has two core segments; the RH Segment and Waterworks. Sifting through both segments, RH offers customers access to virtually anything furnishing related, including furniture, textiles, bathware, lighting, tableware, and much more.

Since 2014, RH brand founder Gary Friedman has led the company as CEO. Friedman has been with RH since joining Restoration Hardware's board of directors in 2001. Alongside Friedman is a strong leadership team with members boasting experience from the likes of Goodby, Banana Republic, Williams-Sonoma, Nike, and more.

In recent months and years, RH has been undergoing a digital transformation which was highlighted in Friedman's most recent investor letter.

“Our strategy is to digitally reimagine the RH brand and business model both internally and externally,” Friedman told investors, going on to explain how the company will continue online expansion.

Digging into the numbers, RH beat Q4 2020 expectations with an EPS of $5.07, better than the analyst’s EPS consensus estimate of $4.76. On a year-over-year basis, EPS improved by 36.29%.

On the revenues front, RH delivered 22% net revenues growth on a year-over-year basis, bringing total net revenue for the quarter to $812.4 million. Do note, on an adjusted basis, net revenues totaled $812.6 million.

Shifting into margin, Q4 GAAP gross margin significantly improved by 480 basis points on a year-over-year basis, bringing the Q4 gross margin to 47.4%. Operating margin also improved, jumping by 740 basis points to 22.6%.

Income exceeded expectations as well, with net income increasing by a sizable 90% year-over-year to $130.2 million. For reference, the Q4 2019 net income level was $68.433 million and represented 10.3% of revenues compared to the 2020 level which represents 16% of revenues.

Profits were impressive as well, with Q4 2020 gross profit totaling $385.128 million, representing a strong improvement over the Q4 2019 gross profit of $283.073 million.

Rounding out the quarter, net cash provided by operating activities totaled $153.507 million, representing a solid improvement over the Q4 2019 level of $128.191 million.

While net cash provided improved, free cash flow took a hit, totaling $37.216 million for the quarter versus the previous Q4 free cash flow level of $96.636 million. Note, the decline in free cash flow was attributed to an increase in equity method investments.

The quarter rounded out a solid fiscal year for RH, with FY 2020 revenues totaling $2.849 billion. The FY 2020 revenues level represents 8% revenues growth on a GAAP basis.

Furthermore, full year net income increased by 23% to $271.8 million and gross margin improved by 510 basis points to 46.5%. Rounding out the full year, free cash flow improved by 23% in 2020 to $405 million.

Shifting into the balance sheet the numbers are solid.

Total Debt: $1.102 Billion

Total Liabilities: $2.451 Billion

Total Assets: $2.898 Billion

Cash & Short Term Inv: $100 million

On a valuation basis, RH does trade at a premium.

Price to Earnings: 65.64x

Forward Price to Earnings: 26.48x

Price to Sales: 4.61x

Price to Book: 28.58x

Price to Cash Flow: 21.57x

Management has been effective.

Return on Equity: 116.74%

Return on Assets: 10.21%

Return on Invested Capital: 15.86%

Given the numbers the analysts are bullish with a mean price target of $641.36/share, representing a 2.90% upside.

The high price target is $800.00/share, representing a solid 28.35% gain, while the low price target is $500.00/share, representing a -19.78% downside.

The big money is quite involved with 95.84% of RH being owned by institutions. Top holders include Fidelity Management & Research, Berkshire Hathaway, and BlackRock Institutional Trust.

On a technical basis RH could be presenting opportunity. According to the six-month charts the MACD continues to move with downside momentum within a right range around 0.4537.

The six-month charts are also indicating an RSI of 45.65 and CCI of -46.88, both of which continue to move lower.

On the risks front, investors continue to worry about RH’s digital transformation, but given the success so far, investor fear will likely ease.

In short, RH ($RH) is a solid company with a wise leadership team, expanding revenues, increasing profits, a growing customer base, and a well known brand.

EAT - SLEEP - PROFIT

Disclaimer: This is not direct financial advice, simply an opinion based on independent research.