Restoration Hardware had a bad 4th quarter and lowered guidance on Thursday March 28 after the close. They blamed the bad quarter on market volatility and uncertainty in the high end housing market. That’s certainly a plausible explanation if you consider the challenging fundamentals in the housing market in 2018.  The ratio of homebuilders ETF ITB vs. SPY shows considerable underperformance in 2018. However, it’s encouraging that homebuilders have outperformed since December. 

Homebuilders underperformance in 2018 reflects weak housing market

Koyfin chart

The bad quarter doesn’t change the long term thesis. RH is a transformational company in the housing decor space. Its stores don’t sell products, its stores are the product. It’s experiential and it’s something all retailers are trying desperately to become to compete with Amazon. It’s also an attractive acquisition candidate for other brands. For a bull case of RH, check out Citron’s research write-up of the company.

The stock is controversial.  On the bull side, CEO Gary Friedman owns 10.6% of the shares. He’s a promotional CEO who some have accused of being too much of a cheerleader with supporting results. Hedge funds own 12% of the shares which is a decent amount for a $2.5B company.

On the flip side, there are plenty of bears. It’s easy to hate because like many great companies the vision of experiential retail is pushing the boundaries. Short interest is at 33% of shares.  But notice in the chart below that short interest has remained high even as the stock went from 20 to 160 in 2017 and 2018. The haters have been permabears for a long time. 

High short interest even as stock went from $20 to $160

Koyfin chart

From a technical perspective, the current level is a great entry point. RH is trading around 108 after the miss which is a strong support level. Technicals 101 will teach you that previous resistance becomes support, which is what happened in June 2018.  If the stock breaks 105, the technical picture gets more bearish.

The stock is trading at an important support level

Koyfin chart

Sometimes it makes sense to buy stocks with momentum, other times it makes sense to buy stocks at support.  If RH can hold 105, the bull case and entry point is compelling.  If you didn’t own it before, the Christmas sale arrived early.