One of Warren Buffett's Smaller Holdings Is Making Some Big Moves

It’s been a couple of weeks since RH (RH) announced two strategic acquisitions and one hiring that ought to be winners for the luxury furniture and design company. 

Warren Buffett and Berkshire Hathaway (BRK.B) own 10% of the company formerly known as Restoration Hardware. While its investment only accounts for 0.2% of Berkshire’s $317 billion equity portfolio, the moves could convince Buffett, and his investment lieutenants -- Todd Combs and Ted Weschler -- that it’s worth buying more of the company’s stock, especially given its shares are down more than 53% year-t0-date. 

As contrarian moves go, RH makes total sense. Here’s why.

Three Moves to Climb Up the Luxury Mountain

The sub-heading borrows from RH’s Dec. 8 headline announcing the three moves. Let’s get into the details of all three.

The first acquisition was Dmitriy & Co., a New York-based designer and producer of custom upholstery furnishings run by the husband-and-wife team, Donna and David Feldman. They will join RH to run its new business, RH Couture Upholstery. 

The second acquisition is Jeup Inc., a To-the-Trade custom furniture studio run by Joseph Jeup. He will run a second newly created business, RH Bespoke Furniture. 

Lastly, the company has hired Margaret Russell, the former Editor in Chief of Architectural Digest and Elle Decor, to run a third new business, RH Media. 

“Today’s announcements, plus our previous acquisition of Waterworks, firmly plant four RH flags at the very top of the luxury mountain, and clearly state our intention of establishing RH as an arbiter of taste and design in the To-the-Trade, luxury home furnishings market,” Friedman stated in the company’s Dec. 8 press release.

RH Continues to Peel the Luxury Onion

The company’s been busy on many fronts in 2022. 

In September, it opened its New York RH Guesthouse, the company’s move into overnight hospitality. There are just six guest rooms, three suites, and CEO Gary Friedman’s private residence, which is sometimes available to rent. The nightly rates aren’t cheap. Guestrooms run at $2,400 a night with a two-night minimum, but they’re no ordinary rooms. 

Do you get where the company is going with all of this? These various businesses RH has created or will create are meant to add value to its core customers -- the 459,000 people who pay $175 annually to get 25% off the company’s products and services -- those in the top 10% of income earners in America. 

Here’s what Friedman had to say about the company’s vision in its Q3 2022 shareholder letter:

“We believe, ‘There are those with taste and no scale, and those with scale and no taste,’ and the idea of scaling taste is large and far reaching,” Friedman stated.

“Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world.”

Friedman readily admits that the downturn in the housing market will affect the company’s business in the short term. However, in the long term, it expects to generate annual global revenues of between $20-$25 billion. 

“Although my uncertainty regarding the short term has expanded due to a complete collapse of the luxury housing market, my excitement for our long-term opportunity has grown exponentially as I believe the investments we are making to elevate and expand our product and platform will once again be transformative,” Friedman stated. 

Could a Takeover Be Brewing?

Friedman owns 23.1% of the company’s stock, according to WhaleWisdom.com. Berkshire owns another 10%. The next largest shareholder is Vanguard Group, with 8.6% of the stock. 

In the third quarter ended Sept. 30, Berkshire added 190,000 shares. The holding company first started buying shares in RH in Q3 2019. The estimated average price paid is $218.61, 12.7% below where it’s currently trading. 

Berkshire Hathaway has been in the furniture business for a long time. It paid $55 million for 90% of Omaha-based Nebraska Furniture Mart in 1983. Nearly 40 years later, Buffett still is invested in furniture businesses. 

RH ultimately could be his biggest bet on the industry. 

At the stock’s all-time high of $744.56 in August 2021, RH was valued at $16.2 billion. Today, it’s about 38% of that amount. Assuming no premium, RH could be acquired for less than $8 billion, including the assumption of $1.6 billion in net debt.

That is not going to happen. 

RH has too much going on for Friedman or Buffett to agree to such a haircut. Currently trading at 1.89x sales, its lowest valuation since 2018 -- despite generating more than $800 million operating income in the trailing 12 months -- provides long-term value investors with a good entry point.

But as Friedman points out, the complete collapse of the luxury housing market suggests RH stock could go lower in the first half of 2023. Keep some dry powder to buy more should this come to pass. 

I won’t be shocked if Berkshire’s Q4 2022 13F, released in February, shows that the holding company has bought some more RH stock. 

We’ll know soon enough. 

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