RH currently trades at $200 per share and has shown little upside over the past six months, posting a middling return of 4.2%. The stock also fell short of the S&P 500’s 22.7% gain during that period.
Is now the time to buy RH, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is RH Not Exciting?
We don't have much confidence in RH. Here are three reasons there are better opportunities than RH and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak 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 within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While RH posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, RH’s capital-intensive business model and investments in new physical locations have consumed many resources. Its free cash flow margin averaged negative 5.2%, meaning it lit $5.21 of cash on fire for every $100 in revenue.
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 $50.91 million of cash over the last year, and its $3.86 billion of debt exceeds the $34.56 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 doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 19× forward P/E (or $200 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of RH
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