Of all the stock purchases Warren Buffett made last year in Berkshire Hathaway's (NYSE: BRK-B)(NYSE: BRK-A) portfolio, arguably most confounding was his third-quarter buy of roughly 1.2 million shares of home-furnishings retailer RH (NYSE: RH). As fellow Fool Sean Williams argued earlier this week, RH, the mid-cap consumer discretionary stock formerly known as Restoration Hardware, doesn't seem to fit Berkshire's usual mold of buying and holding the world's biggest-name brands with staggering reach and superior moats.
To be fair, Berkshire's position is worth "just" $256 million as of this writing -- around 6.5% of RH's shares outstanding but also less than 0.2% of Berkshire's mammoth $250 billion equity portfolio. So noting that Buffett generally involves himself only with the portfolio's most consequential multibillion-dollar moves, the Oracle of Omaha might not have made this purchase himself, delegating the decision to one of his investing lieutenants Todd Combs or Ted Weschler.
Even so, after mulling it over, I think Berkshire's RH stake makes more sense than you might think for a couple of reasons.
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"Building a brand with no peer"
First, as I pointed out last April, RH management surprised investors in early 2019 with its counter-intuitive approach to succeeding in retail, namely by spurning "digital first," shunning social-media advertising, continuing to mail large Source Book catalogs, and accelerating new openings of RH's large brick-and-mortar Gallery locations. Meanwhile, as other retailers relied on promotions to drive omni-channel sales and take market share, RH opted to differentiate itself by moving to a membership model.
RH Chairman and CEO Gary Friedman elaborated at the time:
We believe when you step back and consider: One, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today's retail landscape, and we would argue, will also prove to be equally valuable.
It's hard to argue with their results so far. RH shares have rallied 150% from their 52-week low as of this writing, spurred by a trio of beat-and-raise quarterly reports in June, September, and December, ahead of the lucrative holiday season.
An acquisition candidate?
I also can't help but wonder whether Buffett is mulling whether to significantly increase Berkshire's stake or acquire RH outright.
After all, a quick glance at Berkshire's dozens of acquired subsidiaries shows that the company already owns four other furniture retail concepts -- Jordan's Furniture, Nebraska Furniture Mart, Star Furniture, and RC Willey Home Furnishings -- arguably none of which enjoy the same brand recognition as RH's core concept.
And Buffett has quipped in the past that his favorite holding period for any given stock is "forever." But he's also been known to build on positions that started relatively small. Take Berkshire's interest in Apple, for example, which began as a 9.8 million-share investment for roughly $1 billion in 2016, but now stands as the company's single-largest holding at nearly 249 million shares worth over $74 billion today.
All things considered, it would be relatively easy for Berkshire to use its $128 billion cash hoard to take RH's budding business under its enormous wing, even after assigning a healthy acquisition premium over RH's modest $4 billion market cap today.
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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends RH and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). 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.
