3 Reasons to Buy RH Stock Like There's No Tomorrow

Though its business has been struggling since the pandemic began to recede as a public health emergency, RH (NYSE: RH) has had a recent surge in the stock market.

The high-end maker of leather couches and living room sets is up by 75% from its September low following a pair of better-than-expected earnings reports that showed the company was finally returning to form.

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While the housing market is still tight, I see three reasons why there's a lot of upside potential for RH stock.

Image source: RH.

Growth is back

The home furnishings sector as a whole has been in a bit of a rough patch for a while now, but after several quarters of disappointing results, RH's revenue rose 8% to $811.7 million in its fiscal third quarter (which ended Nov. 2). Though homes sales remain weak, it seems to be benefiting from improving consumer sentiment and lower inflation.

A revamped product lineup and its new RH Modern Sourcebook have helped drive that revenue growth, and demand (a proxy for orders) is up even faster, rising 24% in November and up 30% for the month of December through Dec. 11 when RH reported its fiscal Q3 earnings.

Demand growth is a leading indicator for revenue, and in fiscal Q4, revenue growth is expected to accelerate to 18% to 20%, paving the way for a strong 2025. Management sounded a bullish note around the upcoming mailing of its Interiors and Outdoor Sourcebook in February, and it increased its advertising spending in the quarter, a sign of confidence in demand.

Adjusted operating income also surged in Q3, more than doubling to $121.8 million. Overall, the company is delivering solid numbers and taking market share at a time when the housing market is still slow.

It's expanding on multiple fronts

RH continues to open new galleries in the U.S. Its openings at the end of 2024 included locations in Newport Beach and Montecito, California, and in Raleigh, North Carolina. Seven more North American galleries will open their doors in 2025.

More importantly, the company has recently expanded into Europe, and has openings planned for Paris and London in 2025. Management says it expects an inflection of its business this year. RH England, the first gallery it opened in Europe, reported sales growth of 42% in the second half of 2024, while the associated online business was up 111%. It's now on track to generate $31 million in revenue from that store in its second full year and $7 million from the web business. Based on those numbers, the European market seems to hold a lot of promise for RH.

Beyond that, RH is experimenting with businesses beyond home furnishings: It has opened up restaurants and a hotel, is leasing charter jets and a yacht, and plans to launch its own streaming video service focused on architecture and design.

Those moves significantly expand the company's addressable market.

The housing market will recover

Finally, RH's recent recovery has been particularly impressive because it's come at a time when the home furnishings sector still faces significant headwinds due to the slowdown in the housing market.

However, the housing market should eventually recover, as the U.S. is estimated to have a shortage of as many as 4 million homes. Investors may have to wait for benchmark interest rates to come down as well as mortgage rates, and Treasury yields have been stubbornly high even as the Fed has lowered its rates.

Finally, as a high-end brand, RH should benefit from consumers having more money to spend, which should happen as the economy has been resilient. In other words, RH will eventually benefit from shifting macroeconomic factors, and when that happens, the stock could really take off.

Additionally, CEO Gary Friedman is a bold leader and a visionary thinker, and is focused on penetrating and expanding the company's addressable market.

Keep your eye on the pattern of accelerating revenues at RH. If it continues, the stock could finish 2025 significantly higher than where it started.

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Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.