America faces both a Retail Apocalypse and a retail stock bubble. For example, on 17 September 2021 Mr. Market paid $672.15 for Restoration Hardware Holdings (NYSE: RH) a company that reported $988.86 million in quarterly revenues on 31 July 2021.
Meanwhile, CoStar Group estimates 12,200 US retail stores closed in 2020, Fortune reports. Many of the closed stores were mall based retailers such as Restoration Hardware (RH).
Hence, US retail shrinks as Mr. Market pays more for some retailers. I suspect some of the overpriced retailers are meme stocks. See GameStop (NYSE: GME) for the worst example of an over-hyped retailer. Mr. Market paid $204.97 for the dying video game emporium on 17 September 2021.
The Retail Stock Bubble
However, I think Restoration (RH) could be a worse bubble than GameStop because Mr. Market paid $672.15 for it on 17 September 2021. In contrast, Mr. Market paid $144.73 for Walmart (WMT), a company with quarterly revenues of $141.048 billion on 31 July 2021.
So yes, there is a retail stock bubble in which Mr. Market pays more for modest niche retailers than lucrative giants. Disturbingly, the retail stock bubble grows as thousands of brick and mortar retails stores close.
Restoration Hardware is a modest niche retailer. It operates around seventy stores, or galleries, in the United States and Canada. Those galleries sell overpriced home furnishing and hardware to affluent Baby Boomers.
I suspect Restoration is a meme stock because its shares appeal to the affluent people who enjoy shopping at its galleries. Wealthy Baby Boomers buy RH just as nostalgic Generation X gamers invest in GameStop. These people base investments on emotion rather than the company’s value.
Does Restoration Hardware Make Money?
Sensible investors, however, will ask: “does Restoration Hardware (RH) make money?”
Currently, the answer is yes. Restoration reported a quarterly operating income of $248.99 million and a quarterly gross profit of $487.68 million on 31 July 2021.
Impressively, Restoration Hardware grew during the pandemic. Restoration’s quarterly operating income rose from $35.45 million on 30 April 2020. Similarly, RH’s quarterly gross profit grew from $199.65 million on 30 April 2020.
Stockrow estimates Restoration Hardware’s revenue grew by 78.26% in the quarter ending on 30 April 2021 and 39.42% in the quarter ending on 31 July 2021. Overall, Restoration’s quarterly revenues grew from $482.89 million on 30 April 2020 to $988.86 million on 31 July 2021.
So, Restoration Hardware grows and makes more money. It appears to be a healthy company.
How Much Cash is Restoration Generating?
Restoration Hardware (NYSE: RH) generates some cash. It reported a quarterly operating cash flow of $141.76 million on 31 July 2021.
Conversely, the quarterly operating cash flow fell from $156.47 million on 31 July 2020 and rose from -$16.87 million on 30 April 2020. In contrast, the quarterly ending cash flow rose from $180,000 on 30 April 2020 to $61.31 million on 31 July 2021. The quarterly ending cash flow rose to $235.53 million on 30 April 2021.
Impressively, Restoration Hardware is not borrowing much money. It reported a quarterly financing cash flow of -$47.86 million on 31 July 2021. The quarterly financing cash flow is down from -$147.49 million on 31 July 2020. The last positive quarterly financing cash flow was $3.18 million on 30 April 2020 at the beginning of the pandemic.
However, Restoration Hardware’s total debt rose from $1.737 billion on 31 July 2020 to $1.767 billion on 31 July 2021. So Restoration Hardware finished the pandemic with more debt.
Restoration Hardware finished the pandemic with more cash. The cash and short-term investments grew from $17 million on 31 July 2020 and $17.21 million on 30 April 2020 to $296 million on 31 July 2021.
What Value Does Restoration Hardware Have?
I think the value of Restoration Hardware (RH) is small. The company has a small amount of cash and limited assets.
Restoration Hardware had $3.467 billion in total assets on 31 July 2021. During the pandemic, the Total Assets grew from $2.43 billion on 30 April 2020.
Thus, Restoration’s value is small. I do not see how a sane person could justify the $672.15 Mr. Market paid for RH on 17 September 2021. Thus, I regard Restoration Hardware as a bubble stock investors to avoid. In fact,
I think Restoration has a negative margin of safety because of the ludicrous share price. I think investors need to avoid Restoration Hardware because the bubble will burst and the retail apocalypse will come to this retailer.
Originally published at https://marketmadhouse.com on September 17, 2021.
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