Up 1,800% in 5 years, is this furniture inventory a purchase?

HR (NYSE: RH), more commonly known as Restoration Hardware, has been an outstanding performer in recent years. In addition, the company has great ambitions that could take its activity to the next level. In this fool live Video clip, recorded on December 13, Fool.com contributors Matt Frankel and Jason Hall discuss the company’s plans and whether they think the stock will be a big outperform in the coming season. following several years.

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Matt Frankel: RH, if you are not familiar, this is a high end furniture company, a luxury furniture brand. Just to go over some of their stats, they’ve actually done quite well over the past year. Revenue increased 20% in the last quarter year over year. Their margins are surprisingly high for a furniture company, around 28% adjusted operating margin, which is pretty impressive for a furniture brand.

The stock has performed extremely well, which as a growth type I’m surprised you ranked lower because HR has delivered an 1,800% return over the past five years. They see a pretty big opportunity. Their 12-month revenues are in the order of $ 3 billion. They see an opportunity to increase it to $ 25 billion over time.

They have a fairly ambitious 2020 plan, 2022 rather. They present RH Contemporary, a new line they call their biggest product launch of all time. They are developing internationally. They open a gallery in London, RH England, they call it. They are opening a hotel in New York, the RH Guest House. I saw Danny pull a face, and so did I when I read it, to be fair. But if you’ve been to an HR store before, this sounds like a place I’d like to stay. It’s not that far from their core business as you might expect, but it’s one of the reasons I ranked it # 10 [out of 10 “holiday shopping” stocks].

There is a lot going on. Their end goal is to have a design gallery in all the major markets around the world. That’s where their $ 25 billion opportunity came from. And for me, I ranked it nine out of 10, I believe. For me, I ranked it low because it seems like they’re trying to do too much. I think they are venturing a bit too far from their basic skill. The hotel thing, I made the exact same face Danny just did, wish everyone could see it. But we both made faces when we saw that they were opening a hotel.

The $ 25 billion target looks like it would take a lot to get to that point. It is not cheap stock. As I mentioned, it has increased by 1,800% over the past five years. So I wonder how they’re going to take it to the next level for shareholders. I think this is the most binary of these stocks in terms of more to lose if things start to go wrong. But it’s just me. Guys, what do you think?

Jason Hall: I’m going to jump in really quickly here, and I can tell you that I love the industry, absolutely love it, and I’ll tell you why, to some extent, it deserves to be such an outperforming in the market. It’s a retailer that gets 24% operating margins and the gross margins reach 50%. It’s incredible. I own some of their furniture, and it is very good furniture. It is really high quality, it is beautiful. I can argue whether it’s too expensive or not, because like so many luxury items, it’s worth what people are willing to pay for it.

Here is the reason I ranked this No. 10. Despite these things, it trades five times sales. The bottom line is that it’s not SaaS [software-as-a-service] business. It’s not a business that’s going to get 85% operating margin. It will never be that deal, and I think five times the sales is insane. The bar is so high for the type of performance this business will need to generate to earn this.

Jason hall has no position in any of the stocks mentioned. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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