RH (RH) in Corte Madera, Calif., and Haverty Furniture Companies, Inc. (HVT) in Atlanta, Ga., are two well-established retailers of residential furniture in the United States. RH offers furniture, lighting, textiles, bath ware, décor, outdoor and garden, and child and teen furnishing products. HVT is a specialty retailer of residential furniture and accessories, custom upholstery products, eclectic looks, and mattress product lines. It also offers financing through a third-party finance company and an internal revolving charge credit plan. Both the companies distribute their products primarily through retail stores and websites.
With the continuation of remote working, people are upgrading their homes and improving the quality of living and home-working environments. Further, Americans' ability to spend more on discretionary items is driving the demand for comfortable and good-quality furniture. Amid the rising demand, falling lumber prices make the backdrop favorable for furniture companies. The global furniture market is expected to grow at a 4.1% CAGR to $538.40 billion by 2026, and both RH and HVT are likely to benefit from the industry tailwinds.
But while HVT’s stock price has gained 13.6% over the past six months, RH has surged 40.9%. In terms of the past year's performance, RH is a clear winner with 90.3% gains versus HVT’s 46.8%. So, which of these stocks is a better pick now? Let’s find out.
Latest Movements
On May 7, 2021, RH opened RH Dallas Gallery, which comprises the brand’s largest luxury home furnishings and an integrated hospitality experience. RH Chairman and Chief Executive Officer Gary Friedman said, “RH Dallas represents our ongoing quest to revolutionize physical retailing with architecturally inspiring spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality.”
On January 5, RH announced that it is making a $105 million initial equity investment connected with real estate development initiatives in Aspen, Colorado. The investment includes properties to be developed into retail locations, hospitality concepts, residential developments, and workforce housing projects. The company plans to operate its branded businesses as part of the Aspen ecosystem and to be a real estate investor and partner for the remaining properties.
On July 30, 2021, HVT opened a specially designed store in The Villages community, the largest retirement community in the world. Building a smaller footprint than a traditional HVT store, HVT has focused on in-home design service, H Design. HVT has hired a dedicated staff of design consultants who will visit customers' homes to help them choose the perfect pieces to complete their homes. HVT is looking forward to capitalizing on the sale of its merchandise made with expert craftsmanship and design.
Recent Financial Results
RH’s net sales for its fiscal first quarter, ended May 1, 2021, increased 78.3% year-over-year to $860.79 million. The company’s adjusted gross profit has been reported at $406.97 million, representing a 101.5% year-over-year improvement. Its adjusted operating income came in at $194.25 million, up 304.1% from the prior-year period. While its adjusted net income increased 375% year-over-year to $142.25 million, its adjusted EPS increased 285% year-over-year to $4.89. The company had $229.53 million in cash and cash equivalents as of May 1.
For its fiscal second quarter, ended June 30, 2021, HVT’s sales increased 127.3% year-over-year to $250 million. The company’s gross profit came in at $141.50 million, up 137.2% from the prior-year period. Its pre-tax income has been reported $29.11 million for the quarter, up 54.6% from the year-ago period. HVT’s net income came in at $22.86 million, representing a 67.6% year-over-year improvement. Its adjusted EPS increased 132.7% year-over-year to $1.21. As of June 30, 2021, the company had $235.34 million in cash and cash equivalents.
Past and Expected Financial Performance
RH’s revenue and net income have grown at CAGRs of 9.8% and 135.6%, respectively, over the past three years. RH’s EPS has grown at a 124.7% CAGR over the past three years.
Analysts expect RH’s revenue to increase 36.9% year-over-year in the current quarter (ending July 31, 2021), 29% in the current year, and 8.1% next year. Its EPS is expected to increase 11.3% year-over-year in the current quarter, 27.2% in the current year, and 10.1% next year. The stock’s EPS is expected to grow at a 19.6% rate per annum over the next five years.
In comparison, HVT’s revenue and net income increased at CAGRs of 4.8% and 58.9%, respectively, over the past three years. HVT’s EPS has grown at a 66% CAGR over the past three years.
Analysts expect HVT’s revenue to increase 17.8% year-over-year in the current quarter (ending September 30, 2021), 33.9% in the current year, and 1.4% next year. Its EPS is expected to increase 20.1% year-over-year in the current quarter, 147.1% in the current year, but decline 2.8% next year. Analysts expect the stock’s EPS to grow at a 13.1% rate per annum over the next five years.
Profitability
RH’s trailing-12-month revenue is 3.4 times HVT’s. RH is also more profitable, with a 26.5% EBITDA margin versus HVT’s 12.8%.
Also, RH’s ROE, ROA and ROTC values of 132.2%, 16.7%, and 22.5%, respectively, compare favorably with HVT’s 31%, 9.3%, and 12.6%.
Valuation
In terms of non-GAAP forward P/E, RH is currently trading at 29.53x, which is 269.1% higher than HVT’s 8x. RH’s 1.68x non-GAAP forward PEG is 110% higher than HVT’s 0.80x.
Also, in terms of forward EV/Sales, RH’s 4.26x is 526.5% higher than HVT’s 0.68x.
POWR Ratings
While RH has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, HVT has an overall A grade, equating to Strong Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
HVT has an A grade for Value, which is consistent with its lower-than-industry valuation ratios. HVT’s 0.68x forward EV/Sales value is 55.9% lower than the 1.53x industry average. However, RH’s D grade for Value reflects its overvaluation. The company has a 4.26x forward EV/Sales, which is 178% higher than the 1.53x industry average.
In terms of Quality, HVT has been graded an A, which is consistent with its higher-than-industry profitability ratios. HVT’s 56.7% trailing-12-month gross profit margin is 62.6% higher than the 34.9% industry average. In comparison, RH has a B grade for Quality, which is in sync with its relatively lower profit margin. The company has a 47.6% trailing-12-month gross profit margin, which is 36.4% higher than the 34.9% industry average.
Of the 63 stocks in the A-rated Home Improvement & Goods industry, RH is ranked #35, while HVT is ranked #4.
Beyond what we’ve stated above, our POWR Ratings system has also rated both HVT and RH for Momentum, Growth, Stability, and Sentiment. Get all RH ratings here. Also, click here to see the additional POWR Ratings for HVT.
The Winner
The rising demand for furniture, combined with falling lumber prices, will likely benefit RH and HVT. However, we think its relatively lower valuation and better financials make HVT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Home Improvement & Goods industry.
RDWR shares were trading at $32.27 per share on Friday afternoon, up $0.08 (+0.25%). Year-to-date, RDWR has gained 16.29%, versus a 18.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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