RH (NYSE:RH) has appreciated by 55% this year. That’s impressive given how RH is at the lowest point since its 2012 IPO.
RH stock owners realized in 2015 that management’s lofty goals won’t be met so easily. As a result, RH stock fell from $100 to $25 between 2015 and 2016. It has since recovered, and apparently, it is because RH (NYSE:RH) has produced three consecutive quarters of sequential growth. Moreover, investors think RH will return to double digit growth this year.
Thing is, it should!
RH management likes of tout “comparable sales growth”. Up until recently, RH has maintained the same number of stores, and achieved double digit same store sales growth.
However, as seen in the above chart from BNLMarketAnalytics.com, RH’s store selling square footage (the area in which it sells merchandise) has consistently increased since its IPO. Even in 2014, selling square footage rose about 10%. In 2015, it was 15% to 20%. Over the last few quarters, selling space has risen to about 30% compared to the year prior.
In other words, RH (NYSE:RH) comparable sales and total revenue should rise! With that in mind, the following chart is very concerning.
Despite a significant increase in selling square footage year-after-year, total revenue growth has seen a sharp decline.
Yes, RH (NYSE:RH) has produced three consecutive quarters of sequential growth. However, if you look at the company’s fourth quarter — the quarter that caused such a big spike in RH stock — its total revenue is just about flat over the last two years, from 2014 to 2016. It certainly seems that RH has peaked. After all, selling square footage has risen 50% over the same span!
Therein lies the reason for RH margin pressure. It is operating more square footage and creating less revenue vs selling space. Given what we are seeing, it is hard to figure how RH can grow annual revenue to $5 billion with margins in the mid-teens. At 19x forward earnings, we consider RH stock fair value at best, with downside potential when Wall Street realizes what BNLMarketAnalytics.com is showing us.
I’ll conclude with a third chart to further state our case.
RH direct revenue, which is created from source books, is a dying business. Four consecutive quarters of year-over-year loss in direct revenue.
This business still accounts for more than 45% of the company’s total revenue. There are no signs of a turnaround in direct revenue, and we think RH (NYSE:RH) will have a hard time meeting expectations with this business dwindling down. Very reminiscent of Groupon when its coupon business peaked and it evolved into e-commerce. That did not bode well for Groupon, and it won’t for RH stock either.