Did RH just fire the starting gun for the housing market recovery?

RH (RH 25.49%)the company formerly known as Restoration Hardware, has long been a battleground in the retail sector.

The company has one of the most colorful CEOs in the business in Gary Friedman, who is prone to eccentric and eccentric statements, but is also one of the boldest thinkers in the industry.

RH also has a unique business model: The company opens cavernous galleries to showcase its high-end furniture and mails books to promote its products. It has begun to dabble in services, opening a handful of guesthouses and restaurants, and charters a yacht and jet as it aims to expand its luxury halo beyond furniture.

Like much of the home furnishings sector, RH has struggled as rising interest rates dampened the housing market and booming demand during the peak of the COVID-19 pandemic quickly cooled.

However, in its second-quarter earnings report, which it released on Thursday, the company offered a glimpse of recovery. It was enough to send the stock up 19% in after-hours Thursday and even attract peers Wayfair and Williams-Sonoma higher (both rose 5% in the after-hours session).

RH’s Q2 numbers

RH’s fiscal second quarter, which ended Aug. 3, shows the business still faces a weak housing market, but the company beat estimates. Revenue rose 3.6% to $829.7 million, beating expectations of $824.5 million.

However, margins were affected as gross margin fell from 47.5% to 45.2% and SG&A increased 5 percentage points to 33.6%. As a result, adjusted earnings per share fell from $3.93 to $1.69, but that was still better than the $1.56 consensus.

These estimates show how low expectations for the sector have fallen. RH has also become popular with short sellers, with 25% of shares sold short.

Given this positioning, a brief squeeze may also have helped push the stock higher after hours.

Where is RH headed

In previous earnings reports, Friedman criticized the state of the housing market as a catastrophe, but with interest rate cuts around the corner, he appears to be taking a more optimistic stance and also touted recent investments the company has made.

Looking ahead to the third quarter, the company sees revenue growth improving to a 7% to 9% range, and demand, or a proxy for orders, is expected to rise 12% to 14%. The second quarter was also the company’s first period of positive revenue growth since 2022, and guidance for the third quarter shows it continuing to tilt higher.

Importantly, product margins are also starting to turn positive, which could return the company to economic growth.

Are housing stocks about to rise?

The rise in RH stock bodes well for the company as there is still plenty of room for improvement, but there is an entire sector of stocks that have been left out of the market’s recovery. Beyond stocking home furnishings retailers like Wayfair and Williams-Sonoma, home improvement retailers like Home Depot and Lowe’sand real estate stocks like Redfin, Zillowand Opendoor technologies all seem poised to benefit from a housing recovery.

The Federal Reserve is expected to begin cutting interest rates, which should gradually ease pressure on the housing market, lifting these stocks. Friedman is still banking on the Fed’s help, saying, “We are the best-positioned brand in our industry to benefit from the anticipated rebound in the housing market once interest rates fall and home prices reset lower.”

Based on the response to RH’s report, investors appear to be hungry for good news in this battered sector. As interest rates begin to decline, RH and its peers look like a good bet to outperform in the coming quarters.