Is RH a Recession Resistant Stock?
It is difficult, if not impossible, to predict when a recession will begin or end. Making macroeconomic forecasts is an impossible game that must be avoided.
Therefore, it would be prudent for long term investors to stress test potential holdings when looking for high quality companies to add to an equity portfolio. Understanding and thinking about how a business performs in an adverse economic scenario will allow you to focus only on resilient businesses that are successful in any environment.
Let’s see if HR (NYSE: RH) corresponds to the definition of an all-weather stock.
For the rich
RH offers high-end home furnishings mainly through its 68 galleries. These are grandiose showrooms, some of which exceed 30,000 square feet of retail space. The company sells expensive luxury goods, so that its customers belong to the wealthier segment of the population. A recession followed by a decline in the stock market or real estate values would also cause the net worth of these people to decline, potentially hurting demand for HR as discretionary buying slows.
The pandemic-fueled recession earlier this year was different from a ‘normal’ recession as it was the result of a non-economic shock (the coronavirus pandemic), which ultimately brought most activities to a screeching halt. commercial. Although the net sales for the first quarter of 2020, which ended on May 2, were down 19.3% compared to the period of the previous year, HR has actually seen an improvement in business trends. week to week from end of March to end of term. Demand from core businesses, which is the dollar value of customer orders placed but not yet delivered, increased in May, June, July and August compared to the previous year.
This is interesting because you would think that big purchases, especially lavish home furnishings, would be delayed when economic uncertainty is so high. While CEO Gary Friedman certainly thinks HR is benefiting from a “COVID-induced spending shift in favor of the home,” he thinks the company’s strategy of building an unparalleled global brand does what to start. HR’s second quarter figures bear witness to this: the company delivered a record operating margin and profitability.
HR has been resilient during what has been the biggest downturn in economic activity in recent memory. After being forced to temporarily close locations, the company came out stronger on the other end, validating the argument that it is recession-proof. RH will continue to thrive as persistently low interest rates and an accommodating Federal Reserve support asset prices for the foreseeable future.
In addition to analyzing the implications of demand, a smart investor should also consider how a company’s finances can be affected during a recession. As revenue declined in the first quarter, RH recorded a loss of $ 3.2 million, which was rather impressive considering the store closings that occurred towards the end of the quarter.
What should have been three devastating months turned out to be just a speed bump on the road for RH. Given the retail nature of the business, the balance sheet also has significant liabilities. But these pose no threat to the company’s creditworthiness – the $ 549 million in convertible senior notes bear no interest, and the nearly $ 1 billion in lease debt will be honored as RH plans to pay. ” open new locations wisely in the years to come.
Protect your wallet
Similar to Home deposit, RH is benefiting from the renewed consumer focus on home improvement and renovation due to stay-at-home orders and freed-up spending that would otherwise be spent on recreation and entertainment. The difference for RH is that its clientele is affluent and has more disposable income than the average American household. This provides a floor for the business in times of stress, as we saw earlier this year.
HR stock is up 73% in what has been a tumultuous 2020, demonstrating its recession-proof status. Investors looking to build an all-season portfolio should add HR to their watchlists.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.