RH invests $1.2 billion in share repurchase amid challenging market conditions

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RH invests $1.2 billion in share repurchase amid challenging market conditions
Credit: © Reuters.

In a surprising move, RH (NYSE: RH ), the luxury furniture company, has invested a substantial $1.2 billion in repurchasing its own shares in the three months leading up to Wednesday. This decision comes despite the company's market capitalization being less than $6 billion and a period of challenging business conditions.

The company's revenue fell 21% in the first half of its fiscal 2023 compared to the same period in fiscal 2022, largely due to trends in the housing market. Fewer people are moving homes and consequently buying less furniture, which has been particularly problematic for RH as it updates its inventory this year. The company has had to lower prices due to decreased demand, reducing operating-profit margins.

Further adding to RH's challenges, business conglomerate Berkshire Hathaway (NYSE: BRKa ) revealed in May that it sold its entire investment in RH stock, nearly 2.4 million shares valued at over $600 million at the time. The move by Warren Buffett's firm was interpreted by many as a negative sign for the home furnishings sector.

Despite these headwinds, RH's CEO Gary Friedman remains optimistic about the future. He predicts that the Federal Reserve will lower interest rates within the next year, leading to increased activity in the housing market. Furthermore, he expects that RH's new inventory will drive strong consumer demand regardless of housing market trends.

The share repurchase was funded by over $2 billion borrowed on term loans in 2021. A significant portion of this debt is on a loan with a 7.69% interest rate as of Q2, leading to rising quarterly interest expenses for the company.

This isn't the first time Friedman has made a bold bet on RH's future. In 2017, the company repurchased about 30% of shares outstanding in a very short time period, which was followed by a surge in the stock price as business performance exceeded expectations.

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