RH's Retail Strategy, Recent Pullback Turn Stifel Bullish

RH RH's financial profile has meaningfully improved, according to Stifel. 

The Analyst

Analyst John Baugh upgraded RH from Hold to Buy and raised the price target from $142 to $150.

The Thesis

RH’s strategy has been to increase retail square footage in an environment where brick-and-mortar is increasingly under siege, Baugh said — but the retailer is now championing a new strategy. (See the analyst's track record here.)  

“The company is now pioneering new real estate models that have much better financial profiles than legacy stores and are a beacon of the premium brand RH has developed." 

The company’s larger store openings are providing a differentiated retail experience and the perception of a premium brand, Baugh said. New development deals that are underway will enable RH to open stores without a meaningful capital investment — a big blow to the bear thesis, he said. 

The analyst's No. 1 concern regarding RH has been valuation, but after a recent pullback, the shares now provide an attractive and less risky entry point, he said. 

RH's year-over-year margin improvement has been significant, with RH lapping SKU rationalization and posting more overall full-price sales at a time where furniture retailers are absorbing many cost increases, Baugh said. 

“The move to the membership model in 2016 has proven to be a game changer that has allowed the company to step away from seasonal promotions, has smoothed out the pace of sales growth and been a nice tailwind to margins." 

RH has an international opportunity that remains untapped, “but could essentially double the addressable revenue opportunity," the Stifel analyst said. 

Price Action

RH shares were up 3.71 percent at $123.07 at the time of publication Friday.

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