Why RH's Luxury Retail Story Might Be Turning Around

The Recent Struggle Is Real

RH (formerly Restoration Hardware) has faced significant headwinds in recent years. The luxury home goods retailer saw its stock plummet over 58% year-to-date, and over the last five years, it has surrendered more than half its value while the S&P 500 index climbed 87%. This sharp divergence reflects the company’s vulnerability to housing market cycles.

The numbers tell the story: RH’s revenue peaked at $1 billion in Q3 2021 but cratered to $727 million by fiscal Q1 2024. More troubling, the operating profit margin compressed from over 20% to just 12% on a trailing-12-month basis. Market uncertainty around tariff impacts and intensifying competition have kept investors on the sidelines, despite early signs of stabilization.

Green Shoots Emerging

However, there are genuine reasons to believe the worst may be behind RH. The most recent quarter showed revenue rebounding to $899 million, suggesting demand is gradually recovering. With the Federal Reserve expected to continue cutting interest rates, housing-sensitive stocks like RH could benefit from improved affordability and consumer sentiment.

More importantly, RH has begun taking pricing actions to offset tariff-driven cost increases, a strategy that should gradually restore margin health. Analyst forecasts suggest the operating margin could recover to nearly 20% by fiscal 2030—a substantial improvement from current levels.

International Expansion: The Overlooked Catalyst

Perhaps the most compelling element of RH’s turnaround story lies in its international strategy. The company’s expansion into Europe is gaining momentum, with demand in England surging 76% in the recent quarter alone. This geographic diversification requires significant upfront investment but could unlock a much larger profit pool over the coming decade.

If RH successfully executes its global growth strategy while restoring domestic margins, the earnings trajectory could be substantial. Analysts project 46% compound annual growth in adjusted earnings per share over the medium term. At a forward price-to-earnings ratio of 12.8, the valuation appears to underestimate this potential.

The Bottom Line

RH remains a cyclical business tied to housing trends, but the current environment presents an intriguing contrarian opportunity for long-term investors. The combination of margin recovery tailwinds, favorable interest rate dynamics, and early-stage international revenue growth suggests the luxury home goods retailer’s investment case may be far more compelling than recent stock performance implies.