Todd Williamson/Getty Images Entertainment

Todd Williamson/Getty Images Entertainment

RH (NYSE:RH ) is luxury furniture brand that has built out locations across North America. As a premier luxury brand, RH earns luxury margins. Since last summer, shares have dropped from the mid-700 range into the mid-400 range. Management is planning expansion into Europe and has already secured locations in England and Continental Europe.

Shares of RH are materially undervalued at today’s prices, and investors looking for a company that is attractively valued with a long growth runway and a moat around the business would be wise to consider RH. I think investors at today’s prices are going to benefit from some multiple expansion as well as the international expansion of the business.

There aren’t many luxury brands out there that stand out in their sector the way RH does. Apple (AAPL) is an obvious comparison when it comes to brand power for cell phones and computers. The furniture industry is certainly a different animal when compared to tech hardware, but RH has carved out a strong position when it comes to brand recognition.

I would strongly recommend investors that might be interested go to their website and poke around a little bit. From the gallery locations to the actual furniture and projects like the Beach House and Ski House, every page on the website and every piece of furniture oozes the luxury brand image that RH wishes to portray.

Ski House Gallery rh.com

RH isn’t content to rest on their laurels in North America either. They are planning an expansion into Europe, which is a large market for luxury products. My guess is that their first European locations will be London and Paris, but that’s just an educated guess. RH has even started to integrate restaurants and wine bars into some of the locations here in North America.

Another thing to note for investors is the member program. Members pay $150 per year (which for anyone buying furniture from RH is pocket change) for 25% off all items, and an additional 20% off the items that are on sale. Capturing wealthy customers and building relationships with them is likely to increase brand loyalty and drive additional purchases in the future.

One of the first things investors will notice looking at RH’s financials is the war chest of cash. RH has $2.2B in cash on the balance sheet 10/31/21. Most of this was due to a $2B debt issuance in October, but net income for the first nine months of 2021 was well over $500M, so that also was a factor. The maturity date is in October 2028 and the current interest rate is 3% (with the potential to float higher if LIBOR increases). There is also a step down for the interest rate if RH receives credit ratings from the major agencies.

Debt is always something investors should keep an eye on, but with the interest rate environment we are in, borrowing at 3% to invest in a business that is growing revenues and profits as fast as RH is an appealing opportunity. For a company with a market cap just over $10B, $2.2B in cash is a significant amount of dry powder on the balance sheet. My guess is that management will start to put it to good use in 2022 with the European expansion effort.

Looking at the income statement we see margins that are remarkable for a furniture company with large galleries across North America. Gross margins were just over 50% for Q3. RH also saw lower selling, general, and administrative expenses in Q3 compared to the prior year, which is impressive considering double digit revenue growth. As long as management executes well on the coming European expansion, I think margins are likely to hold up well.

Shares of RH don’t usually trade with a P/E lower than 20x. While the stock has seen a large haircut since peaking last summer in the mid-700 range, I think that shares of RH are a steal under $500. The current P/E is just under 18x. If shares return the normal ratio around 25x, investors are looking at attractive returns from these prices.

I’m not the only one who likes RH either. Berkshire Hathaway (BRK.A) (BRK.B) owns over 8% of RH. Long term investors looking for a timely pick will find that there is a margin of safety for RH anywhere under $500 a share.

There aren’t many luxury brands out there that have been able to build the reputation that RH has. Shares have sold off hard in the last six months, providing investors with a timely opportunity to buy shares with a margin of safety. Considering that RH is at the beginning of its expansion into Europe, investors have an opportunity to buy shares of this premium luxury brand at a discount. If you are looking for a new addition to your portfolio, don’t miss buying a couple shares of RH while it’s still on clearance sale.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of RH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.