Richelieu’s Hardware: Holding The Line Amid Softening Sales (OTCMKTS:RHUHF)

AzmanL/E+ via Getty Images Thesis In July 2023, I reviewed the Q2 2023 earnings report of Richelieu Hardware (OTCPK:RHUHF) – Richelieu Hardware’s Q2 2023 Earnings: A Case To Hold Position – and noted the company’s sound long-term growth despite a decline from the company’s Q2 2022 results. I pointed out how sales and earnings had increased by 68% and 67%, respectively, between Q2 2019 and Q2 2023. I pointed out that while sales were slightly lower in 2023 than in 2022, Richelieu’s results remained strong due to past acquisitions, strategic expansions, and good management of cash flows. Nonetheless, I also flagged some problems, like a softening in core sales lines and lower EBITDA, which reflected what I considered some underlying issues regarding Richelieu’s profitability and market positioning. With these mixed signals, I called Richelieu a ‘hold,’ trying to weigh the company’s strong dividend growth and potential growth against the fact that it hadn’t performed as well as the broader market. While there was a slight bump in the price of the stock after my call to $36 per share, it has since retreated and relatively flat-lined with a marginal total decline of -4% vs. the S&P 500’s 26% total return during the same period. Grassroots Trading Richelieu Hardware Performance (Seeking Alpha) Today, I returned to Richelieu Hardware and checked in on the latest developments to see how it’s weathering the market. My analysis takes a fresh look at Richelieu’s Q2 2024 earnings where net earnings dropped 23.7% to $23.4 million and earnings per share also slipped from $0.55 to $0.42, a 23.6% decrease. Yet, despite these hits, I argue that Richelieu’s long-term growth, especially in the U.S., and solid financial management support keeping a ‘Hold’ on the stock while advising caution due to ongoing profitability issues and possible overvaluation. About Richelieu Hardware Ltd. Founded back in ’68, this Montreal-based operation has established a firm footprint in the North American specialty hardware landscape, impressing with their multifaceted engagement in manufacturing, importation, and distribution. They deliver everything from glass and decorative hardware for buildings to advanced lighting systems and ergonomic workstation components. Add to that their focus on space optimization with their kitchen and closet storage solutions, and sliding door systems, they’re appealing to a consumer base that’s increasingly seeking more efficient use of space. Plus, they’re tapping into the material needs with offerings like high-pressure laminates and a production line includes veneer sheets, edge banding products, decorative moldings, and they’ve smartly carved out a niche in the window and door industry too. Richelieu’s Peer Performance and Financial Comps Seeking Alpha With a year-to-date return of -18.96%, RHUHF is underperforming most of its peers, and its one-year return of -5.29% also lags behind industry standouts like Distribution Solutions Group (DSGR), which posted a market-beating 37.38% return. Meanwhile, RHUHF stock price remains about 19.84% below its 52-week-high, indicating to me that investor confidence has been sluggish. Seeking Alpha Looking at RHUHF’s margins, they’re steady, though not huge. The gross profit margin is 11.88%, which is lower than HEES at 46.34%. But RHUHF’s EBITDA margin of 10.01% and net income margin of 5.39% tell me they’re keeping things efficient. Their return on equity is 11.28%, solid but not the best among peers. Seeking Alpha RHUHF has decent cash flow (more about this in ‘Risks & Headwinds’ below). It had net operating cash of $171.54M and levered free cash of $115.22M. Seeking Alpha This is high enough that it can pay for all operating expenses and its share of debt obligations without needing to raise outside cash. Its current ratio of 3.27 (see below) means it’s comfortably covered in terms of short-term liabilities. Seeking Alpha Richelieu Hardware’s Q2 2024 Earnings Highlights Richelieu Hardware Ltd. saw a 2% bump in sales for Q2, hitting $407 million and recent acquisitions added 2.7% to that growth. The kitchen cabinet market, making up 40% of Richelieu’s sales, stayed flat in Q3, which, from a positive angle, showed stability in a key segment. But the U.S. market was a standout, with sales jumping 6.1% for the quarter. U.S. manufacturers’ sales did even better, up 8.7%, further proof of the strategy working south of the border. As an example of how these acquisitions have helped Richelieu over the years, they now have numerous distribution centers, each in a different location, which handle different products. For large retailers such as Home Depot, this was no problem since they have their own distribution systems. For small customers, however, this setup was a nightmare. Prior to that, if a small customer wanted to purchase, say, 20 different product lines from Richelieu, the customer had to meet a $500 minimum for each separate warehouse. That meant the customer likely needed several orders to hit each minimum, which is time-consuming and more expensive. Now, by centralizing their distribution, Richelieu has all these products in one place. So, a small customer only needs to hit that $500 minimum once, no matter how many different products they’re buying. This makes it easier and cheaper for these smaller customers to order from Richelieu, which likely means they’ll buy more. Meanwhile, in its niche markets, Richelieu’s commercial innovation segment (which includes mid-work and commercial) experienced a 4.3% increase, with a 6% increase in the U.S. Richelieu’s North American closet business also grew 5%, with a strong performance. U.S. sales for the first half amounted to CAD 380 million, 4.2% higher, representing 43% of the company’s total sales. This strong growth reinforces Richelieu’s expanding footprint in the U.S. Finally, even with current dips (more below in ‘Risks & Headwinds’), the retail market, according to management, is set to bounce back with new projects, like product launches at Home Depot in Canada and upcoming projects with them in October and November, that should drive this improvement. Richelieu Hardware’s Valuation Fast Graphs Judging by the data, Richelieu looks like a stable, but not super high-growth investment with a Blended P/E ratio of 22.80x, it’s slightly overpriced compared to its usual 22.23x yet the market seems to have some faith in Richelieu’s steady 7.12% earnings growth. But when I look at a fair value ratio of 15.00x, the stock might be a bit overvalued right now suggesting investors are overestimating Richelieu’s growth in its sector. The company’s EPS yield is 4.39%, and its dividend yield is 1.54%, so, overall, it’s more of a total return play than a big income generator. As I brought up earlier, Richelieu’s low debt-to-capital ratio is a big plus and as a mid-cap stock, it’s not a high-flyer, so any long-term investors can count on its solid financial management and steady growth, but I wouldn’t expect huge gains anytime soon. Risks & Headwinds The company hit some bumps along the way. Internal sales dropped 0.7% in Q2, slowing overall growth. The Canadian market struggled, with a 1.1% sales dip and a 2.8% decline in internal sales, showing challenges at home. As I alluded to in the highlights above, retail and renovation sector took a big hit, with sales to hardware retailers and renovation superstores down 10.6% in Canada for the quarter and 14% in the U.S. for the first half of the year. U.S. retail sales fell after losing a key (unnamed) customer who decided to source products overseas. While the company said that they’re working to make up for this loss, it hasn’t fully recovered yet. The company’s profitability took a hit, with Q2 EBITDA dropping $7.7 million, or 12.6%, because of higher inventory costs, lower selling prices, and expenditures related to business expansion, shrinking the EBITDA margin from 13% to 11.2%. In Canada, the decrease in the retail business was due primarily to price reductions, especially on products imported from Asia, which could continue to compress margins unless expected price increases materialize. Addressing the question of whether prices are tending to rise for products imported from Asia over the next 18 months, CEO Richard Lord, said that operating costs such as wages and rent are rising and, so far, prices for products from Asia haven’t risen because the market there is slow, but he thinks they’ll start to see prices rising for products from Europe and North America sooner rather than later – probably early next year. Companies there are facing rising costs too and he thinks they’ll have to put their prices up as well. When asked about specific price increases for products from Europe and Asia, Richard said that while some suppliers, like Bloom, are considering price hikes, they haven’t provided any concrete numbers yet. Furthermore, net earnings for Q2 dropped 23.7%, with earnings per share down 23.6%. For the first half, net earnings fell 27.2% and cash flow from operations also took a hit, dropping to $56.2 million from $93.2 million last year, signaling weaker cash generation. Lastly, on a more positive note, by concentrating distribution centers in Eastern Canada and Ontario, the company anticipates seeing annual savings of close to $3 million, including $1.5 million from lower operating costs and $1.5 million from shuttering some locations. However, realizing all the benefits could take some time, and there could be some wrinkles along the way. RHUHF Rating Taking into account Richelieu Hardware’s long-term growth potential, which remains solid, as well as the company’s continued strength in the U.S. market, its strong record of financial management, and its decent cash flow position with low debt-to-capital, I’m going to keep my rating on the stock at ‘Hold.’ Namely, in light of recent challenges, including weak profitability, lagging performance relative to the peer average, and possible overvaluation, there is little to suggest near-term upside potential. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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