The storm clouds are parting on the luxury mountain. After a recent string of glum earnings reports, RH shared its second-quarter results on Thursday, and they were good. The company’s top and bottom line were up, with both numbers meeting or beating analyst expectations. Wall Street loved it, and RH’s stock skyrocketed nearly 20 percent in after-hours trading.
Driving investor enthusiasm as much as these second-quarter results was the company’s outlook for the balance of its fiscal year, spurred by what it called the “vector” (a measurement that combines magnitude and direction) it alleges it has created between itself and its competitors. “While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry,” wrote RH chairman and CEO Gary Friedman in his letter to shareholders, claiming that the company is outperforming the industry by “15 to 25 points.”
At many points throughout the earnings call, Friedman made a variation of that same case for RH’s performance: It had taken longer than expected for its turnaround to start, but now it has, and the company is pulling away from the pack.
Friedman’s mood was more upbeat than in the past few quarters, though the hard numbers show a slightly more muted picture. RH’s guidance for revenue growth for the remainder of its fiscal year is now in the range of 5 to 7 percent, down from previous estimate of 8 to 10 percent. Operating margin forecasts were also taken down a few points. RH turned a profit of $29 million, no mean feat in these times, but it was distinctly less than the $76 million the company brought in during the same quarter last year.
What gave Friedman so much cause for optimism is the fact that demand is trending upward, despite a still-frozen housing market. “Demand was up 7 percent in the second quarter and has continued to inflect positive, gaining momentum each month with July finishing up 10 percent,” he told investors in his letter. The trend apparently continued beyond this reporting period, “accelerat[ing] into the third quarter with August up 12 percent and product margins inflecting positive, despite operating in the most challenging housing market in three decades.”
According to Friedman, it’s all going to result in the market share gains he’s long been strategizing for. “Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia and the Middle East over the next decade.”
Friedman credited a number of initiatives RH has pursued for the improved outlook, chief among them the second mailing of the “RH Interiors” sourcebook, which hit mailboxes throughout July and August, and which he says “is fueling our industry leading demand.” There’s more to come on that front: The next “RH Modern” book will drop in November, followed by an additional “Interiors” in early 2025; the “RH Contemporary” books will now be folded into the other two catalogs.
RH is also planning its first stand-alone sourcebook for Waterworks, projected to debut in 2025. As he did on the past few calls, Friedman highlighted the brand as one of the key growth vehicles for the company, and touted the possibility that it could expand its $200 million in annual sales—largely to the trade—into a billion-dollar business that reaches consumers directly.
Waterworks will feature prominently in a new 90,000-square-foot RH Gallery, scheduled to open this November in Newport Beach, California, with a large showroom for the brand. The same month, RH will also unveil a 50,000-square-foot Gallery in Raleigh, North Carolina. (When talking about the company’s future real estate plans, Friedman also teased on the call an “RH Compound” in Naples, Florida, though he made clear that it would not open for some time.)
Another development sure to pique designers’ interest: The first stand-alone RH Interior Design Office, which is slated to open in Palm Desert, California, in November. Friedman highlighted this initiative, as well as the fact that the company plans to unveil more of them in the years to come. “We believe there is an opportunity to address new markets locally by opening Design Offices in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation,” he wrote. “The Palm Desert location is a unique test of a consumer facing professional interior design office, separate from a Gallery. Our goal is to establish the RH brand as the leader in the world of professional interior design, and enable us to attract the highest caliber interior designers in the industry.”
In a characteristically discursive Q&A session with analysts, Friedman acknowledged that RH still had struggles to contend with, including the expense of its European expansion, slow traffic to RH England, and missteps with the Contemporary collection. But his tone was positive, and he jumped ebulliently from subject to subject, marveling at the brand’s long-term initiatives and expressing confidence that the worst of the short term was over. “We feel very good about the business right now,” he said emphatically. “We like where we are.”
Correction: Sep 13, 2024
An earlier version of this story misstated that Gary Friedman referenced a planned RH Compound in Naples, Italy. The proposed location will be in Naples, Florida.
