RH vs. Ethan Allen: Which Furniture Stock is a Better Buy?

RH (RH) and Ethan Allen Interiors Inc. (ETD) are two well-established residential furniture retailers in the United States. RH offers furniture, lighting, textiles, bath-ware, décor, outdoor and garden, and child and teen furnishing products. ETD operates as an interior design company, and manufactures and retails case goods items, upholstery items, home accent items, and home and garden furnishings. Both companies distribute their products primarily through retail stores and websites.

Continuation of remote working structures amid the resurgence of COVID-19 cases and rising consumer spending this holiday season is creating the demand for quality home furnishings lately. This trend will likely continue due to the growing demand for quality furniture this holiday season. The global furniture market is expected to grow at 4% CAGR and reach $113.61 billion by 2024. So, both RH and ETD should benefit this holiday season.

While RH lost 13.9% over the past three months, ETD has surged 3.6%. ETD is a clear winner with 2.9% gains versus RH’s negative returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let us find out.

Recent Financial Results

RH’s adjusted net revenues for the fiscal third quarter, ended October 30, 2021, increased 19.2% year-over-year to $1.01 billion. The company’s adjusted gross profit came in at $505.25 million, up 23.5% from the prior-year period. Its adjusted operating income came in at $278.71 million, indicating a 23.7% rise from the year-ago period. RH’s adjusted net income came in at $208.60 million, indicating a 25.3% rise from the year-ago period. Its adjusted EPS increased 13.4% year-over-year to $7.03. As of October 30, 2021, the company had $2.20 billion in cash and cash equivalents.

For the fiscal first quarter ended September 30, 2021, ETD’s net revenues increased 20.7% year-over-year to $182.33 million. The company’s adjusted gross profit came in at $109.19 million, representing a 27.3% rise from the prior-year period. Its adjusted operating income came in at $27.73 million, up 125.4% from the prior-year period. ETD’s adjusted net income came in at $20.43 million for the quarter, indicating a 128.1% rise from the year-ago period. Its adjusted EPS increased 122.2% to $0.80. The company had $2.39 billion in cash and cash equivalents as of September 25, 2021.

Past and Expected Financial Performance

RH’s net income and total assets have increased at CAGRs of 23.3% and 7.2%, respectively, over the past three years. The company’s EBITDA has increased at a CAGR of 17.7% over the past three years.

Analysts expect RH’s EPS to grow 45.5% year-over-year in the current year and 1.2% next year. Its revenue is expected to grow 33% year-over-year in the current year and 9.5% next year. Its EPS is expected to rise at a 23.6% rate per annum over the next five years.

In comparison, ETD’s net income and total assets grew at CAGRs of 83.5% and 43.3%, respectively, over the past three years. EBITDA has grown at a CAGR of 44.2% over the past three years.

ETD’s EPS is expected to increase 25.7% year-over-year in the current year but decline 1.3% next year. Its revenue is expected to increase 9.8% year-over-year in the current year but decline 1.1% next year. Analysts expect ETD’s EPS to grow at a rate of 9.2% per annum over the next five years.

Valuation

In terms of forward EV/EBITDA, RH is currently trading at 12.58x, which is 138.3% higher than ETD’s 12.58x. In terms of forward EV/Sales, ETD’s 0.87x compares with RH’s 3.57x.

Profitability

RH’s trailing-12-month revenue is almost 5.1 times that of ETD's. RH is more profitable, with a 27.6% EBITDA margin versus ETD’s 15.7%.

Furthermore, RH’s ROE, ROA, and ROTC of 103%, 14.1%, and 17.7%, respectively, compare favorably with ETD’s 20.9%, 9.2%, and 12.9%.

POWR Ratings

While ETD has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, RH has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

ETD has a B grade for Momentum, owing to its 2.7% returns over the past week. RH’s C grade for Momentum is in sync with the stock's 5.8% decline over this period.

ETD has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. ETD’s 58.2% trailing-12-month gross profit margin is 62.2% higher than the 35.9% industry average. In comparison, RH’s B grade for Quality reflects its relatively lower profitability ratios. RH has a 48.6% trailing-12-month gross profit margin, which is 35.4% higher than the 35.9% industry average.

Of the 61 stocks in the B-rated Home Improvement & Goods industry, ETD is ranked #16, while RH is ranked #42.

Beyond what we have stated above, our POWR Ratings system has also rated ETD and RH for Growth, Stability, Sentiment, and Value. Get all ETD ratings here. Also, click here to see the additional POWR Ratings for RH.

The Winner

Growing demand for good quality furniture and rising consumer spending ahead of the holiday season should enable both RH and ETD to profit substantially. However, a lower valuation makes ETD a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Home Improvement & Goods industry.

RH shares were trading at $547.51 per share on Thursday afternoon, down $20.52 (-3.61%). Year-to-date, RH has gained 22.34%, versus a 26.31% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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