Despite a drop in revenues, investors still counting on RH

As NYU professor Jonathan Haidt puts it, “The human mind is a story processor, not a logic processor.” 

Though RH revenues dropped 4.4% to $738 million for the fiscal fourth quarter compared to the same quarter a year ago, and though quarterly net income of $11.4 million fell nearly $20 million short of expectations, investors snapped up shares in the company. 

For the fiscal year ended Jan. 28, RH reported net sales of $3.6 billion, down 4.5% from the $3.8 billion reported the year prior. For the year, net income slipped 23.2% to $528.6 million from $688.5 million a year ago. 

Despite these drops, RH share prices soared 17% the day after the company’s quarterly earnings call, during which it was revealed that RH fell short of both top- and bottom-line expectations for the second consecutive quarter. 

The Street is buying the RH story because, among other things, the stock market is an index of hope and of something we might call trust.

That the stock did so well on tepid financial results is a testimony to CEO Gary Friedman, who is one of the industry’s best storytellers, which isn’t to disparage at all either the story or the storyteller. He has proven astute in seeing the threats and the opportunities, then crafting a narrative that meaningfully anticipates and situates both. These narratives also serve the industry as a whole in educating the Street about the idiosyncrasies of the home furnishings industry.

From RH’s fiscal 2023 annual report

After a year of “adversity, innovation and investment” for Team RH, Friedman is projecting revenue growth this next fiscal year of 8% to 10%. Bold! For the disappointing quarter, Friedman cited bad winter weather and Red Sea shipping disruptions, which combined to cost the company approximately $40 million in sales. (The effect of the Baltimore bridge disaster will be “minimal,” according to the company.)

We’ve detailed in this space RH’s long-term global strategy, which, if successful, would put the luxury retailer on par with LVMH or Chanel. Nearer term, as in this next fiscal year, results will likely hinge on consumer acceptance of its new outdoor furniture collection, which Friedman said is off to an “exceptional” start, the continued rollout of the company’s largest-ever tidal wave new product, and, as always, upon interest rates. Friedman called the current housing market the “most challenging” in three decades.

For the year, RH’s adjusted operating margin was 13% and the adjusted EBITDA margin was 18.2%, which Friedman attributed to lower revenues, markdowns resulting from RH’s comprehensive “product transformation,” and costs associated with its global expansion. 

Counted on to drive growth this next year is the RH Outdoor Sourcebook, or 14 new collections of outdoor that rolled out during the past two months. RH sees itself gaining “significant market share” in outdoor this year, according to its published statement. In addition, the 30 collections comprised by the RH Modern Sourcebook are just arriving in homes this month, collections that cover all furniture categories and that in aggregate are a complete product line reset for the company. 

Global expansion

On the heels of the launches of RH England (June 2023), RH Munich and RH Düsseldorf (November 2023) and RH Brussels (last month), global expansion will next take the brand to France with RH Paris (2025) and Australia with RH Sydney (2026). In North America, five Design Galleries are on tap for this fiscal year, including Cleveland, which just opened in the last week. Palo Alto and Montecito, California; Raleigh, North Carolina; and Newport Beach, Virginia, are the other destinations. 

The “drag” on margins caused by all of this international investment are predicted to run at about 200 basis points for fiscal 2024, according to Friedman, who forecasted an adjusted operating margin for this fiscal year to end up at 13% to 14%. Another source of drag will be RH’s backlog, which the company is predicting to end up between $110 million and $130 million at year’s end, which is another way of predicting significant growth in demand.  

When asked whether the drag on results from expansion globally will “taper quickly or slowly,” Friedman used more than 2,700 words (I counted) avoiding a direct answer. He chose instead to explain how complex any one of RH’s many international showplaces are to site, build or refit and take operational and to stress the “halo effect” from a brand awareness perspective these elite properties produce, among other emphases. 

The RH Three yacht

The point: “Give us some time. It’s going to pay off, and it’s going to pay off big.”

Specific to RH England, situated 30 miles north of Oxford in what is essentially countryside, Friedman admitted that RH underestimated the overall time it might take to build the brand and ramp the brand to a consumer given the remote location. 

“What’s the population of Aynho Park?” he asked, rhetorically. “A few hundred people?”

Still dodging the Morgan Stanley analyst’s question, Friedman cautioned that, internationally, RH is “just out of the gate,” and while not in the order that it would have preferred, it still is a sequence of openings that will put RH in the major style centers of the world. 

This comprehensive global expansion eventually will take RH to $20 billion to $25 billion in annual sales as RH begins competing in sectors that include hotels and hospitality, real estate and housing, kitchen and bath, and, most recently, outdoor furnishings. 

With the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and others, and with a plan to open design galleries in every major market, the RH strategy is “to move the brand beyond curating and selling product to conceptualizing and selling spaces,” according to the annual report. “Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.”

Weak housing market

For the needle on consumer demand to move to any significant degree, the housing market will have to improve. It’s the worst home sales market in 30 years. Friedman said he predicts a series of quarter-point cuts in the prime interest rate, beginning in the second half of the year. (For his part, Jerome Powell, chair of the Federal Reserve, indicated no hurry to lower rates.) The (eventual) cuts will help, but Friedman also cautioned about the lag time between any cuts and their effect on demand, because most people are already locked in on their mortgages.

“You need home prices to come down and you need interest rates to come down,” he told analysts. “And that gap, I think, is going to take longer than three quarter-point interest rate cuts.”

(It’s not known whether Friedman participated on the call from his office, from his Malibu home or from his other Malibu home 12 doors down from his first. According to the Robb Report, Friedman bought a 5,600-square-foot house in Malibu in August for $26.7 million and a 4,000-square-foot “stunner” in December that closed for $28.5 million.)

While pointedly refusing to offer guidance on any timeline beyond fiscal 2024, Friedman did say that the company is aiming to return to 20% operating margins “over the next several years,” a goal complicated by the housing market and by challenging business conditions. 

RH’s annual report states that the company sourced 75% of its volume from 28 vendors, with the largest of these accounting for 14% of purchase dollar volume. Two-thirds of this volume came from Asia, including 30% from Vietnam, 22% from China and the remainder mostly from India and Indonesia. About 14% was domestically produced.

A few notes

One of the newest locations for RH is Cleveland, where a 55,000-square-foot store and rooftop restaurant opened in the Chagrin Highlands development adjacent to Pinecrest. The new three-story building includes indoor and outdoor selling spaces on the first floor, furniture and an interior design studio on the second, and a rooftop restaurant and wine bar on the third floor.

The 55,000-square-foot RH Cleveland, which opened last month

The RH workforce shrunk again in fiscal 2023, dropping 3.6% to 5,960 from 6,180 a year prior. In fiscal 2021, the total workforce numbered 6,470, putting the downsizing since then at 7.9%. 

Brian Carroll

Brian Carroll covered the international home furnishings industry for 15 years as a reporter, editor and photographer. He chairs the Department of Communication at Berry College in Northwest Georgia, where he has been a professor since 2003.

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