Why RH Stock Dropped 33% in March

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What happened

Shares of RH (NYSE: RH) plunged 33% in value last month, according to data from S&P Global Market Intelligence.

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RH stock, formerly known as Restoration Hardware, was already down more than 10% for the month ahead of the fourth-quarter earnings report on March 28. The company's quarterly earnings results failed to please investors, causing the shares to nosedive.

So what

After posting double-digit growth in revenue in the year-ago quarter, the most recent quarter showed demand significantly falling off. Revenue was flat year over year in the fourth quarter and up only 3% for the full year. For that, management blamed the recent market volatility, negative trends in the high-end housing market, and recent efforts to cut unprofitable and non-core areas of the business.

However, management has emphasized that it prioritizes growing profits over revenue, and last quarter's performance reflected this focus. Even with demand weak, operating margin jumped to 15.4%, compared with 10.3% in the year-ago quarter. This drove robust growth in adjusted earnings per share of 78% year over year for the recent quarter.

Now what

RH does things differently from the typical retailer. For example, while other retailers are doubling down on digital capabilities, RH is doing the opposite by focusing on running better stores and not giving into the temptation to run promotional discounts to drive sales growth -- which would hurt margin.

This unorthodox approach made the revenue declines more severe last quarter, but CEO Gary Friedman explained that RH will continue to do things differently to deliver superior returns over the long term:

Given that the stock price is up 236% since the IPO in late 2012, it's hard to disagree with Friedman's style.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.