Original Recommendation

Restoration Hardware

Restoration Hardware (RH)

our opinion

sell

current price

$170.83

target price

$150

market cap

$3.18B

div yield

0%

  • Luxury home prices are falling everywhere. RH's business model is predicated on selling high priced goods to wealthy customers. We see this slowing down.
  • Last year at this time, RH dropped 22% in one day after disappointing on its earnings. Economic data shows this is happening NOW.

trade details

“It shouldn’t be any new news to anybody that severe volatility in the stock market is going to sway a business like ours, especially a high-ticket business like ours that can be pretty discretionary.”

The above quote comes from Restoration Hardware (NYSE: RH) CEO Gary Friedman.

Friedman’s been CEO since 2011. The company went public into 2012. And is up more than 400% since.

You could say Friedman knows the business. Restoration Hardware sells high-end home furnishing products – some of the biggest consumer discretionary products.

Wealthy people splurge on home renovations when times are good. They don’t when things start to turn.

And if you’ve been looking around the country, you’d notice times have been pretty good. Every major U.S. city has undergone a construction boom. Luxury apartments. Luxury condos. Skyscraper buildings. New business centers.

But underneath the surface… luxury real estate hasn’t been doing great. And that’s bad for RH.

Real estate brokerage firm Redfin notes home sales of $2 million and above fell 16% in the first quarter – the biggest decline since 2010.

“The average price of a ‘luxury’ home, which Redfin defines as the top 5% in each of the 1,000 cities it tracks, fell 1.6% to $1.55 million. ”

Manhattan home prices have fallen the most since 2011. “In the three months through September, 93.6% of all purchases were at or below the last asking price, the second-highest share since the end of 2011.”

Boston’s average luxury sale price is down 22.4%. Newport Beach, California -21.8%. Miami -19.3%. Greenwich, Connecticut down 25%.

We can continue listing prime markets, but you get the picture.

The U.S. consumer looks to be thinking differently about pulling the trigger on big purchases. This University of Michigan survey gauges consumer sentiment about big ticket purchases – like furniture, TVs, among other things.

It’s now down to levels last seen since 2014.

Also notice how every downturn precedes a recession.

Nobody spends on big ticket items in a recession. They preserve cash.

Not to mention RH has selectively increased the prices of products imported from China by 25% to match the rate of tariffs. Consumers are pulling back their spending on big ticket items while RH is raising prices to protect their margins. Even affluent consumers are sensitive to price increases.

Now if we turn to RH, you would think things are going great. It’s at its all-time high.

We think analysts are forgetting that RH is a cyclical company. It’s revenue and profit growth are backward looking. We think investors are setting themselves up for disappointment.

Take RH last year in Q4. The housing market was depressed this time last year. The stock fell 22% in a day after its Q4 earnings.

This time won’t be different.

We’re catching RH at its high as it’ll begin to roll over. Even officers at RH are selling shares at the top. In the last 30 days, five separate executives at RH have sold shares in the open market. Not one executive has acquired shares of RH stock this year.

Short Restoration Hardware down to $168. Put no more than 1-2% of your portfolio into this position.

Our first price target is down to its 50 day moving average at $150. After that, we think it’ll head quickly to its previous trading range in the $120s.

Our stop loss will be at $190. This will be a new high for the stock and signal a potential breakout above $200.

The U.S. consumer is tapped out entirely. Debt is at all-time highs. Recession warnings are flashing. Houses are sitting on the market longer than we’ve seen in several years.

And we’re shorting one of the biggest cyclical names in the market. We like our prospects.