At 4:23 p.m. last Thursday, shortly after trading had wrapped up for the day on the floor of the New York Stock Exchange, RH released its highly anticipated fourth-quarter earnings report, which would finally give analysts their first look at how the company ended 2018.
Gary Friedman, RH’s chairman and CEO, had raised the company’s earnings and revenue guidance just the quarter before, so analysts were feeling hopeful about the results. They would soon learn, however, that their optimism was misplaced. Within minutes of the report’s release, RH shares fell by more than 15 percent in after-hours trading following the news that Friedman was now lowering the company’s earnings and revenue guidance after what turned out to be a difficult December for the retail giant. RH reported that adjusted net income rose to $76 million, or $3 per share, on revenue of $670.9 million. Revenues were essentially flat to the previous year and came in below the analyst consensus number of $686.3 million.
RH’s earning report and the conference call with analysts that followed reveal how the company was thrown by the recent volatility in the stock market and the continued slowdown in the high-end real estate market.
When RH last reported its earnings (December 3), the company outlined robust demand; its stock price popped, and the company announced its intention to raise $300 million in new debt the very next day. But on December 4, as RH began discussions with lenders, the Dow Jones Industrial Average fell nearly 800 points. It was the beginning of a significant pullback in the market, one that would impact far more than just the company’s debt financing.
By December 13, RH had announced that it had scrapped its plans to borrow more money. “RH has determined that current market conditions are not conducive to an attractive convertible note offering at this time,” said the company in a statement, stressing that its internal cash flow from operations was more than sufficient to meet its future obligations and long-term goals. The company referred to the notes offering as “opportunistic,” as if the money was just sitting there waiting to be borrowed. Turns out, it wasn’t.
By Christmas Eve, the day the stock market finally bottomed, the Dow had lost more than 15 percent of its value and RH’s sales figures were beginning to show the effects. “Our core RH business, which has historically tracked to stock market fluctuations, experienced a sales decline of approximately 10 points, beginning the third week of December, which persisted through the remainder of the fourth quarter, leading to a $13 million shortfall,” wrote Friedman in the latest earnings report.
Perhaps more troublesome: “Fiscal 2018 free cash growth of $163 million fell short of our expectations, largely as a result of the lower revenues and higher inventories due to softer sales.” Further sign, perhaps, that the company would have liked to have secured that $300 million in new debt.
Yet despite the clear signs that RH’s customers were feeling nervous about the declining stock market, and despite the fact that the latest efforts to raise capital had failed, the company still saw fit to spend over $100 million in the quarter buying back its own stock. Between December 2 and January 5, the company repurchased 891,129 of its shares at an average price of $118.25.
In his latest letter to shareholders, Friedman wrote: “On Team RH, we say leaders have to be comfortable making others uncomfortable.” (He shared a similar sentiment with BOH last fall: “Leaders are generally misunderstood because leading is about changing things, and change makes people uncomfortable,” he said. “We have to be comfortable making everyone else uncomfortable—that’s when we know we’re on the right track.”)
Friedman has certainly succeeded in making one group very uncomfortable—the Wall Street analysts who cover RH. By day’s end on Friday, as RH shares closed down 22 percent on the day, most of them had cut their price targets and some analysts had actually downgraded the stock altogether. But Friedman’s love/hate relationship with Wall Street seems to fuel his ambition. He made it quite clear on the earnings conference call that he and the company will soon be back to buying up shares, once the dust of this recent setback settles. Just where he’ll pull the money from this time is all that remains to be seen.
Dennis Scully is the host of the weekly BOH podcast, where he explores the changes and challenges facing the interior design community through interviews with industry thought leaders, entrepreneurs and creatives. He is also the vice president of sales and marketing at luxury textiles company Castel. Scully was previously a business development consultant for major trade brands, and has held sales and marketing roles at Domino, Waterworks and Twill Textiles. In his Market Watch columns, Scully calls upon his background as an analyst and long-time securities trader as he explores the ins and outs of the home industry’s publicly traded businesses.
Disclaimer: The author does not hold shares of the companies featured in this column at the time of the story’s publication. The views, thoughts and opinions expressed here belong solely to the author, and do not necessarily reflect those of BOH. The material is for informational purposes only, and does not constitute any form of financial advice.