Up to 1800% in 5 years, is this furniture stock a purchase?

HR (NYSE: HR), more commonly known as Restoration Hardware, has been a standout player in recent years. Moreover, the company has big ambitions that could take its business to the next level. In this crazy live Video clip, recorded on December 13Fool.com contributors Matt Frankel and Jason Hall discuss the company’s plans and whether they think the stock will perform well over the next following several years.

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Matt Frankel: RH, if you’re not familiar, it’s a high-end furniture company, a luxury furniture brand. Just to review some of their stats, they’ve actually grown quite well over the past year. Revenue increased 20% in the last quarter year over year. Their margins are surprisingly high for a furniture company, around 28% adjusted operating margin, which is quite impressive for a furniture brand.

The stock has done extremely well, which as growth players I’m surprised you’ve ranked so low because RH has returned 1,800% over the past five years. They see a pretty big opportunity. Their 12-month revenue is around $3 billion. They see it as an opportunity to grow it to $25 billion over time.

They have a fairly ambitious 2020 plan, 2022 rather. They’re introducing RH Contemporary, a new line they’re calling their most significant product launch yet. They are expanding internationally. They’re opening a gallery in London, RH England, they name it. They open a hotel in New York, the RH Guest House. I saw Danny make a face, and so did I when I read it, to be honest. But if you’ve ever been to an RH store, this sounds like a place I’d love to stay. It’s not as far from their core business as you might expect, but that’s one of the reasons I rated it #10 [out of 10 “holiday shopping” stocks].

There’s a lot going on. Their ultimate goal is to have a design gallery in every major market in the world. This is where their $25 billion opportunity came from. And for me, I rated this nine out of 10, I believe. For me, I’ve rated it low because it seems like they’re trying to do too much. I think they stray a bit too far from their core competency. The hotel thing, I did the exact same face Danny just did, wish everyone could see it. But we both made faces when we saw that they were opening a hotel.

The $25 billion goal seems like a lot to get to that point. It’s not a cheap stock. As I mentioned, it has increased by 1,800% over the past five years. So I wonder how they’re going to take it to the next level for shareholders. I think it’s the most binary of all these stocks in terms of more to lose if things start to go wrong. But that’s just me. Guys, what do you think?

Jason Hall: I’m going to jump in here very quickly, and I can tell you that I love the business, I absolutely love it, and I’m going to tell you why to some extent it’s worth being so successful in the market. This is a retailer with operating margins of 24% and gross margins reaching 50%. It’s incredible. I own some of their furniture, and it’s very good furniture. It’s really high quality, it’s beautiful. I can argue about whether it’s overpriced or not, because like a lot of luxury items, it’s worth what people are willing to pay for it.

Here is the reason why I rated this #10. Despite these things, it trades for five times the sales. The main thing is that it is not a SaaS [software-as-a-service] business. It’s not a company that’s going to get 85% operating margins. It’ll never be that business, and I think five times the sales is crazy. The bar is so high for the kind of performance this company will need to generate to earn this.

Jason Hall has no position in the stocks mentioned. Matthew Frankel, CFP® has no position in the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Gertrude H. Kerr

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