Stock Story -
What Happened: Shares of luxury furniture retailer RH (NYSE:RH) fell 17.6% in the morning session after the company reported disappointing first-quarter earnings results: Its adjusted EBITDA and EPS missed analysts' expectations. Looking ahead, next quarter's guidance was below for both revenue growth and adjusted EBITDA margin, showing that the company is not only growing slower but that growth is less profitable.
Finally, management struck a very cautious tone, calling out "the most challenging housing market in three decades" and the expectation that "the constantly changing outlook regarding monetary policy will continue to weigh on the housing market through the second half of 2024 and possibly into 2025." Overall, the results were quite bad.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy RH? Find out by reading the original article on StockStory, it's free.
What is the market telling us: RH's shares are very volatile and over the last year have had 24 moves greater than 5%. But moves this big are very rare even for RH and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 2 days ago, when the company gained 5.3% after the major indices soared as yields declined after the Bureau of Labour Statistics reported CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of May 2024 came in better than expected at 3.3% year on year (versus analysts’ expectations for 3.4%). The data also revealed that inflation was flat (unchanged) month on month. The inflation results benefitted from a 2% decline in the energy index, while shelter inflation remained sticky (up 0.4% m/m and 5.4% y/y).
Sticky inflation is exactly what has delayed the Fed’s planned rate cuts in 2024, with some market participants likely worried that inflation might stay higher for longer. Today’s report eased those worries a bit.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
RH is down 20.9% since the beginning of the year, and at $226.13 per share it is trading 43.7% below its 52-week high of $401.84 from August 2023. Investors who bought $1,000 worth of RH's shares 5 years ago would now be looking at an investment worth $2,030.
