Amazon (AMZN) Should Buy Restoration Hardware (RH), Giving It Foothold in Fragmented Furniture Space - Loop Capital

Following Amazon's (NASDAQ: AMZN) deal to enter the grocery space in a big way with the acquisition of Whole Foods, Loop Capital analyst Anthony Chukumba thinks buying Restoration Hardware (NYSE: RH) would give Amazon an immediate foothold in the large and fragmented furniture retailing business, would make strategic and financial sense.

The comments follow Amazon's willingness to enter brick-and-mortar via the Whole Foods deal and recent reports Amazon is planning to make a major push into the furniture business. "We believe similar to groceries, furniture retailing is attractive to Amazon due to its large and growing size and highly fragmented nature, with few national competitors to speak of," he said. "And just like the lack of a "brick-and-mortar" presence greatly hindered Amazon's efforts to gain significant market share in groceries, we think not having physical stores will likely make it much more difficult for Amazon to make large inroads in the furniture business."

Chukumba said RH and Whole Foods share many similarities (1) both cater to high income customers; (2) both have attractive national footprints and strong brand names; (3) both have been underperforming recently, which has depressed their share prices—and thus, affords an opportunity to acquire them at reasonable valuations; and (4) both have high-profile, at times controversial CEOs that are closely associated with their companies and we would expect to remain involved post-transaction.

They estimate acquiring RH even at a significant premium to current levels would be EPS accretive to Amazon. Based on the firm's analysis, acquiring RH would be accretive to Amazon's EPS. Assuming a $70 a share (a 31% premium to current levels), all cash offer and no synergies whatsoever, they estimate buying RH would be $0.15, or 1.4% accretive to the current consensus F2018 diluted EPS estimate for Amazon.

The analyst is not recommending investors run out to buy RH stock now on the speculation but thinks it could provide a floor. "While we do not think a potential Amazon takeover is a compelling reason to buy RH stock, we think the possibility of such a deal could provide a "floor."

The firm maintained a Hold rating and price target of $45 on RH.

For an analyst ratings summary and ratings history on Restoration Hardware click here. For more ratings news on Restoration Hardware click here.

Shares of Restoration Hardware closed at $53.47 yesterday.

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