Williams Sonoma vs. RH: Which Furniture Stock is a Better Investment?

RH (RH) and Williams-Sonoma, Inc. (WSM) 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. WSM retails cooking and serving equipment, home furnishings, decorative accessories, and a range of lighting, hardware, and furniture assortments. Both companies distribute their products primarily through retail stores, mail order catalogs, and websites.

While the housing market appears to be cooling off some due to high prices, the demand for furniture remains high. With the continuation of remote working structures owing to the resurgence of COVID-19 cases, people are upgrading their homes and improving the quality of living and home-working environments. This has enabled furniture and home furnishings stores to witness a 3.7% sales growth in August from the prior month. The growing demand for comfortable and good quality furniture should allow furniture companies to offset high lumber prices by raising product prices. The global furniture market is expected to grow at a 4.1% CAGR to $538.40 billion by 2026. So, both RH and WSM should benefit.

While RH lost 3.2% over the past month, WSM surged 4.3%. In terms of the past three months’ performance, WSM is a clear winner with a 20.2% gain versus RH’s negative return. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On September 24, 2021, RH announced the opening of RH Oak Brook, The Gallery at Oakbrook Center. This one-of-a-kind retail concept presents artistic installations of luxury home furnishings in a gallery setting, with expansive spaces devoted to RH Interiors, RH Modern, and RH Outdoor. RH expects to witness high demand for its furniture in the upcoming months.

On July 2, 2021, WSM’s Rejuvenation brand opened Galleria Edina, its first store in Edina, Minnesota. This new Galleria store will serve as a go-to destination for consumers and industry experts looking to shop Rejuvenation’s signature assortment of quality lighting, hardware, and home goods. Customers could seek guidance from store associates or schedule in-home design appointments for additional assistance. WSM expects to gain good sales from the offering of its products and services in the upcoming months.

Recent Financial Results

RH’s adjusted net revenues for its fiscal second quarter that ended July 31, 2021, increased 39.3% year-over-year to $988.86 million. The company’s adjusted gross profit came in at $487.68 million, indicating a 44.6% improvement year-over-year. Its adjusted operating income came in at $262.66 million, up 69.5% from the prior-year period. RH’s adjusted net income came in at $251.63 million for the quarter, representing a 104.6% year-over-year improvement. Its adjusted EPS increased 73.1% year-over-year to $8.48. As of July 31, 2021, the company had $291.46 million in cash and cash equivalents.

For its fiscal second quarter that ended August 1, 2021, WSM’s net revenues increased 30.7% year-over-year to $1.95 billion. The company’s non-GAAP gross profit came in at $858.39 million, indicating a 55.7% year-over-year improvement. Its non-GAAP operating income came in at $325.86 million for the quarter, representing a 67.1% rise from the prior-year period. WSM’s net income came in at $246.07 million, up 82.9% from the year-ago period. Its non-GAAP EPS increased 80% year-over-year to $3.24. The company had $655.21 million in cash and cash equivalents as of August 1, 2021.

Past and Expected Financial Performance

RH’s revenue and net income have grown at CAGRs of 12.5% and 73.8% over the past three years, respectively. The company’s EPS have grown at a 62.1% CAGR over the past three years.

RH’s EPS is expected to grow 44.4% year-over-year in the current year and 1.9% next year. Its revenue is expected to grow 32.2% year-over-year in the current year and 8.7% next year. Analysts expect the stock’s EPS to grow at a 23.6% rate per annum over the next five years.

In comparison, WSM’s revenue and net income have grown at CAGRs of 12.4% and 55.1%, respectively, over the past three years. The company’s EPS have increased at a CAGR of 58.7% over the past three years.

Analysts expect WSM’s EPS to increase 48.9% in the current year and decline 3.9% next year. Its revenue is expected to improve 19.7% year-over-year in the current year and 1.1% next year. The stock’s EPS is expected to grow at a 14.1% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, RH is currently trading at 1.42x, 10.1% higher than WSM’s 1.29x.

In terms of forward EV/Sales, RH’s 4.32x compares with WSM’s 1.85x.

Profitability

WSM’s trailing-12-month revenue is 2.2 times higher than what RH generates. However, RH is more profitable, with a 27.5% EBITDA margin versus WSM’s 19%.

Also, RH’s net income margin and ROE of 15.2% and 114.3% compare favorably with WSM’s 12.7% and 68.9%, respectively.

POWR Ratings

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

Both RH and WSM have a B grade for Momentum, consistent with their impressive price gains. In terms of their year-to-date performance, WSM has surged 88.3%, and RH has gained 52.8%.

In terms of Value, WSM has a C grade in sync with its marginally higher-than-industry valuation ratios. WSM’s 13.15x forward Price/Cash Flow is 0.8% higher than the 13.05x industry average. RH has a D grade for Value, which reflects its overvaluation. RH has a forward Price/Cash Flow of 21.28x, 63% higher than the industry average of 13.05x.

Of the 64 stocks in the B-rated Home Improvement & Goods industry, RH is ranked #28, while WSM is ranked #20.

Beyond what we’ve stated above, our POWR Ratings system has also graded RH and WSM for Growth, Stability, Sentiment, and Quality. Get all RH ratings here. Also, click here to see additional grades for WSM.

The Winner

The ongoing demand for comfortable and good-quality furniture should benefit both RH and WSM. However, a relatively lower valuation makes WSM 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 $694.70 per share on Wednesday afternoon, up $10.94 (+1.60%). Year-to-date, RH has gained 55.23%, versus a 17.26% 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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