RH (RH -2.19%), the company formerly known as Restoration Hardware, has long been a battleground stock in the retail sector.
The company has one of the more colorful CEOs in the business in Gary Friedman, who's prone to hyperbole and outlandish statements but is also one of the boldest thinkers in the industry.
RH also has a unique business model: The company opens cavernous galleries to showcase its high-end furniture and mails out sourcebooks to promote its wares. It's begun dabbling in services, opening a handful of guesthouses and restaurants, and is leasing a yacht and a jet as it aims to expand its luxury halo beyond furniture.
Like much of the home furnishings sector, RH has struggled as rising interest rates have dampened the housing market, and booming demand during the height of the COVID-19 pandemic quickly went cold.
However, in its second-quarter earnings report, which it released on Thursday, the company offered a glimpse of the recovery. It was enough to send the stock up 19% after hours on Thursday, and even pull peers like Wayfair and Williams-Sonoma higher (both were up 5% in the after-hours session).
RH's Q2 numbers
RH's fiscal second quarter, ended Aug. 3, shows the business is still struggling with a lackluster housing market, but the company topped estimates. Revenue rose 3.6% to $829.7 million, beating expectations of $824.5 million.
Margins, however, took a hit as gross margin declined from 47.5% to 45.2%, and selling, general, and administrative expenses rose by 5 percentage points to 33.6%. As a result, adjusted earnings per share tumbled from $3.93 to $1.69, but that was still better than the consensus at $1.56.
Those estimates show how low expectations have fallen for this sector. Also, RH has become popular among short-sellers, with 25% of the stock sold short.
Given that positioning, a short squeeze may also have helped push the stock higher after hours.
Where RH is headed
In past earnings reports, Friedman has decried the state of the housing market as a catastrophe, but with interest rate cuts around the corner, he seems to be taking a more optimistic stance, and also touted recent investments the company has made.
Looking ahead to the third quarter, the company sees revenue growth improving to a range of 7% to 9%, and demand, or a proxy for orders, is expected to rise 12% to 14%. The second quarter was also the company's first period of positive revenue growth since 2022, and the third-quarter guidance shows that continuing to inflect higher.
Importantly, product margins are also starting to inflect positive, which could return the company to bottom-line growth.
Are housing stocks about to rally?
The surge in RH stock bodes well for that company as there's still a lot of room for improvement, but there's a whole sector of stocks that have been left out of the market recovery. Beyond home furnishing retail stocks like Wayfair and Williams-Sonoma, home improvement retailers like Home Depot and Lowe's, and real estate stocks like Redfin, Zillow, and Opendoor Technologies all look poised to benefit from a housing recovery.
The Federal Reserve is expected to begin cutting interest rates, which should gradually relieve pressure in the housing market, lifting these stocks. Friedman is still counting on help from the Fed, saying, "We are the best-positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower."
Based on the response to RH's report, investors seem hungry for good news from this beaten-down sector. As interest rates start to fall, RH and its peers look like a good bet to outperform over the coming quarters.
