We came across a bearish thesis on RH (RH) on Substack by Open Insights. In this article, we will summarize the bears’ thesis on RH. RH (RH)’s share was trading at $307.23 as of March 3rd. RH’s trailing and forward P/E were 85.11 and 24.27 respectively according to Yahoo Finance.
A customer happily browsing aisles of high-end furniture in a large showroom.
Restoration Hardware, now rebranded as RH, is a company that has undergone a radical transformation under the leadership of Gary Friedman. Once a purveyor of low-value home goods, RH has reinvented itself as a luxury lifestyle brand, emphasizing high-end furniture and immersive retail experiences. The company’s galleries are extravagant showcases of its vision, transforming historic buildings into opulent retail spaces, such as a Baroque mansion in Brussels or a massive four-story design gallery in Newport Beach. These spaces are meant to elevate the brand and unlock revenue growth, with Friedman projecting North American sales of $5–6 billion and a global opportunity of $20–25 billion. However, despite the grandeur of its vision, RH’s financials tell a different story.
The company has aggressively expanded its high-end showroom concept, with 37 RH Galleries currently open and more in development across North America and Europe. These locations, often spanning 50,000 to 90,000 square feet, are designed to create an immersive shopping experience that justifies RH’s premium pricing. The company believes this strategy will drive significant revenue growth, but so far, the numbers do not reflect that optimism. Revenue has remained stagnant, and despite the premium pricing of RH’s $10,000 tables and $2,000 chairs, the company has not been able to improve its margins meaningfully. Free cash flow has deteriorated significantly, turning negative in the past two years, driven by a combination of high capital expenditures and declining net cash from operations. With Q4 unlikely to provide a seasonal boost, RH’s ability to convert its expansion into profitability remains uncertain.
The concern is not just about profitability—it’s about sustainability. While the Galleries are impressive, their high construction and maintenance costs raise questions about their long-term viability. Some investors argue that RH is less of a business and more of a “Friedman lifestyle company,” serving to enhance the CEO’s vision rather than delivering returns to shareholders. This skepticism is reinforced by the company’s recent financial maneuvers. RH has spent down its cash reserves from nearly $1.5 billion to aggressively repurchase its own shares, retiring more than 20% of outstanding stock. Meanwhile, Friedman himself has been selling shares into the repurchase, raising further questions about alignment with shareholders. Today, RH operates with little cash on hand, negative free cash flow, and a balance sheet reliant on an asset-based revolver.
Despite the stock declining from its highs, RH still carries a $6.4 billion market cap, implying a valuation of roughly 2x revenue. That might be reasonable for a growing company, but RH’s growth is muted, and its profitability remains elusive. If economic conditions worsen, the luxury furniture sector could face even greater headwinds, potentially pushing the stock down toward its 52-week low of $210. While RH’s vision is bold, investors must ask whether a transformation without sustainable financial results is truly valuable. For now, the Galleries may be stunning, but the financials leave much to be desired.
RH (RH) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 51 hedge fund portfolios held RH at the end of the fourth quarter which was 39 in the previous quarter. While we acknowledge the risk and potential of RH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.