market watch | Sep 8, 2023 |
RH stock dips, but Gary Friedman isn’t skipping a beat

Like just about every other retailer in the home space, RH reported lackluster numbers for its second quarter on both its top and bottom lines in Thursday evening’s report, although it did outperform some analyst forecasts.

But the upscale company, which has a level of optimism about its business that often borders on the fantabulous, upped its own forecast going forward as it rolls out its new tome-size sourcebooks, continues its European and domestic expansions, and steals market share from less aggressive competitors.

Most of all, RH has Gary Friedman, its chairman, CEO, impresario and ultimate cheerleader, who continues to believe in its business model when others might doubt it. “We’ve spent far too much time over the past four years debating if this was going to be the Decade of Home or the Death of Retail,” he wrote in his letter accompanying the financial results. “If there was ever a time the world needed a compass, this might be it. For the people of Team RH, our compass is our vision, values, beliefs and culture. Those things that drive us and unite us. Those things we live for, would fight for and die for.”

The letter continues with Steve Jobs–ian bravado: “We believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and, by doing so, elevating and rendering our way of life more valuable.”

In a call with analysts after the release of the earnings, Friedman continued on those themes, saying that while it was too early to get a real read on the U.K. launch or the new catalog drop, “we’re not going to always be right, but we have a pretty good track record so far.”

First, however, RH and Friedman need to get through the current morass the home furnishings business continues to slog through. For the quarter, the brand’s total revenues dropped just over 19 percent, from nearly $992 million to just over $800 million. Adjusted net earnings were even more impacted, falling almost 46 percent from $164 million to $89 million. Both gross margins and operating margins showed resulting declines.

RH tried to help all its financial results with ongoing stock buybacks—3.7 million shares in the quarter, representing approximately 17 percent of its total outstanding shares—and pushing back about $40 million in costs associated with the mailing of its new sourcebook into the next quarter.

Even as these results beat Wall Street analyst forecasts in some areas, the market did not take kindly to the cold hard numbers, knocking RH stock down about 8 percent in the first rush of after-hours trading. The stock had recently been trading near its 52-week high, reaching $406 a share earlier this summer before settling back down to $369 at the close of Thursday trading right before the earnings release.

Friedman wrote that he didn’t expect any knights in shining home-furnishings armor to come along and rescue the overall retail business anytime soon. “We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year,” he said, “as mortgage rates continue to trend at 20-year highs and the current outlook is for rates to remain unchanged until the second quarter of 2024.”

That said, Friedman believes RH will do better than the industry in general, thanks to the new sourcebook and additional catalogs expected to drop over the next few months, two new galleries in the U.S. (Indianapolis and Cleveland, Ohio) and another two in Europe (Düsseldorf and Munich in Germany), along with a steady stream of new products, all scheduled to debut before the end of RH’s fiscal year in early 2024. He said on the call that he expects a more promising “inflection” point in its business going into next year.

“Never underestimate the power of a few good people,” Friedman preached in his shareholder letter in a way so few CEOs can get away with these days, “who don’t know what can’t be done.”

Homepage photo: RH’s San Francisco gallery | Courtesy of RH

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