Brian Nichols Blog | What Fitbit Inc (FIT) Could Learn From Restoration Hardware (RH) | Talkmarkets
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Date: Tuesday, February 28, 2017 9:04 PM EST

Restoration Hardware Holdings (NYSE:RH) did something last week that was truly genius, although common sense was certainly applied. Management, which has dropped the ball more than a few times, realized that the business is still in turmoil, but the stock is undervalued. With RH stock 25% higher since last Friday, I realized that Fitbit Inc (NYSE:FIT) executives could learn a lot by how RH management just manipulated its stock price.

RH announced its preliminary Q4 report. Keep in mind that RH stock fell about 60% last year, much like FIT stock. What caused RH to surge is the company beat revenue and EPS expectations in its preliminary report. Investors overlooked low expectations and that revenue still represents a 9% year-over-year decline. In fact, the company did not say much to imply a major turnaround this year.

What the home retailer did do is launch a $300 million buyback. In my opinion, this buyback single handily caused a 25% pop in RH stock. Otherwise, RH would have been flat following the preliminary report.

A $300 million buyback would have reduced RH share count by approximately 30% before its report. With respect to its recent rally, the buyback would reduce its share count by 25%.

By doing so, RH stock would have to trade 40% higher just to support its pre-earnings valuation. That’s the effect of a big buyback relative to a company’s market capitalization.

Fitbit (NYSE:FIT) should take notice

If you are a FIT stock owner, then you have accepted the fact that 2017 is going to be rough as Fitbit Inc (NYSE:FIT) prepares to launch new smart wearables and integrate its recently acquired technology.

However, Fitbit has no debt and more than $500 million in cash & equivalents. Fitbit Inc (NYSE:FIT) could essentially reduce its share count by 35% by using cash on hand without ever issuing debt. If Fitbit were to go in this direction, and Fitbit were able to buyback all Fitbit stock at a valuation of $1.4 billion, then FIT stock would have to surge more than 55% just to support the company’s current $1.4 billion valuation.

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Gary Tanashian 10 months ago Contributor's comment

Wonder if the excess cash could be used in other areas, like improving the company's actual business and market standing through acquisition or development? Not intimately familiar with the company, so just thinking aloud here.

Carl Schwartz 10 months ago Member's comment

I agree that $FIT could learn from $RH's stock buyback. But just as the dedicated MP3 player became obsolete with the proliferation of smart phones, I believe #Fitbit is in serious trouble as products like the #AppleWatch go mainstream $AAPL.