RH shares are on pace for their best day in more than three years. Some analysts aren't buying it.

By Bill Peters

The home-furnishings company's Q4 results didn't 'provide resolutions to the key debates' around its future performance, one analyst says

Shares of RH - the home-furnishings chain formerly known as Restoration Hardware - rallied on Thursday and are on pace for their biggest percentage gain in roughly three-and-a-half years, after the company forecast improving demand this year fueled by new outdoor- and indoor-furniture lines, new catalogs and advertising campaigns, and additional retail stores.

Shares of RH (RH) were up 16.8% in early-afternoon trading, putting the stock on pace for its biggest percentage jump since September 10, 2020, when it rose 20.05%. Shares are now up 42% over the past 12 months.

But some analysts worry that the company's forecast eclipsed weaker fourth-quarter sales and margins for the retailer - noting that the RH's outlook didn't account for any big rebound in the housing market that it so depends on for sales.

"As the market continues to seek opportunities to express a constructive view on a potential housing recovery in the U.S., RH's better-than-expected top-line outlook in [fiscal year 2024] likely helped overshadow the retailer's [fourth-quarter] revenues and margins being below its guidance and consensus expectations," UBS analysts said in a research note on Thursday.

They added that while RH said harsh weather in January and shipping delays caused by the conflict in the Red Sea had hit fourth-quarter sales, the company's sales trailed those of Williams Sonoma Inc. (WSM) and Wayfair Inc. (W)

"This mixed evidence means there wasn't really enough to provide resolutions to the key debates, which include how sharp of a recovery will RH experience on an upturn and how will its sustainable profitability look over time," the UBS analysts wrote.

"Thus, we think the stock probably continues to trade in a volatile way around the recent range," they continued.

Sales and profits for RH - where you can buy "latte onyx" tables and aged-teak outdoor-chair sets - are generally tied to the housing market, a key driver of home-furnishings purchases, as well as the stock market, since its wealthier customers tend to have more money to invest.

But higher interest rates and record home prices have left the housing market in something of a standstill. And as inflation crimps spending on items like furniture and clothing, RH and other retailers have marked down their assortments to clear their stockrooms or make way for new products.

Wedbush Securities analysts also have reservations about RH's results. They said that the company effectively turned on its "aspirational luxury" customers by "arrogantly raising prices too aggressively during the pandemic," and added there was little clarity on the path ahead.

"We remain sidelined [on the stock] given the large ramp implied through 2024 with limited visibility, execution risk on an unprecedented number of new products, and disappointing results from new international store openings thus far," they said in a note on Thursday.

And while the company has expressed confidence that it can prop up margins, the Wedbush analysts said RH's suppliers might bristle at lower sales prices.

"The company does not expect new lower-priced product merchandise margins to be lower than prior collections even with an increased focus on value, as it partners with suppliers without sacrificing quality - we find it difficult to see suppliers supporting all of the price reduction on the expectation for higher volumes or for other reasons," the Wedbush analysts wrote.

-Bill Peters

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03-28-24 1417ET

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