by Luxury brand is feasting during the famine
Just before the holidays, RH announced its Q3 earnings report, a ritual enlivened by the earnings call and the always insightful “color” offered during that call by RH’s chairman and CEO, Gary Friedman.
The key takeaways from Mr. Friedman’s focused comments as I heard them:
+ Strong growth in “demand”: Despite a profoundly challenging housing market, RH reported that demand for RH goods and services had increased during Q3 by 13%. November demand was up another 18%, and the first half of December was charging ahead at a rate of about 30% over a year ago. This trajectory seems to soar toward what Friedman calls “inflection,” rare air in which the company is cash-plus, self-funding and no longer plowing big money into builds.
+ Gains in market share: By RH’s calculations, the heady growth in demand translated to market share gains of between 15 and 25 points during the quarter to set up an even bigger land grab during Q4. In short, RH appears to be feasting while many competitors are fasting.
+ Bolstered confidence: Q3 revenues increased by more than 8%, with an adjusted operating margin of 15% and adjusted EBITDA margin of nearly 21%. This strong performance gave RH confidence to raise their guidance for both Q4 and the full fiscal year. And “confident” is the adjective I would apply to the sense I got from the earnings call. Friedman is feeling pretty good, and RH is positioned for a really big year in 2025.
+ Robust product pipeline: A boatload of product was introduced, supported by RH “sourcebooks”, a marketing channel boosted by a $6 million investment during the quarter. Galleries and showrooms are coming online at a steady clip, with rollouts boosted by the introduction of the Waterworks brand at retail.
+ Fast forward: Plans for further expansion, including new galleries in North America and internationally, as well as a “significant” product line extension on deck for 2025, make RH a company to continue to watch this year.
That’s the snapshot; now let’s zoom in on a few details. First, the guidance.
One of the clearest ways that confidence is manifest by a public company is its guidance. RH just raised its Q4 guidance for total demand growth to between 20% and 22% and revenue growth of between 18% and 20%. Q4 revenue growth is now expected to finish between 6.8% and 7.2%.
In addition, the company raised its guidance for adjusted EBITDA margin to between 18% and 19%, and for where the brand is in its progress toward self-funding, EBITDA would seem to be a key metric.
“It’s no different than for how many years Amazon had a depressed model because they were in a serious investment mode to build a platform nobody else has ever built,” Friedman explained to analysts on the call. “If you just go back over the last 10 or 12, 14 years and think about the investments we’ve made in our platform, think about the number of significant galleries we have that are unlike anything in our industry, nobody close. And think about what we’ve built over the last several years, think about the product transformation we went through and the investments that takes to build that. The inventory investments it takes to front-load a business like ours with inventory, so you can add the inventory to create an inflection, right?”
Right. For evidence of progress toward this all-important inflection point, we might look to that most unlikeliest of geographies: West Northamptonshire, England, about an hour north of Oxford. There, surrounded by pasturelands and country roads, the RH Gallery at Aynho is racking up $38 million in sales in only its second year.
If RH England was showing something like $8 million, “I’d be really worried,” Friedman said.
And, if Aynho can do this with no more than 100,000 residents in a 10-mile radius, what can the company expect from RH Gallery locations in Mayfair, London, Paris or Milan in their second years? Three or four times Aynho?
“Most retailers open a new concept, they get enough rights, they expand it,” Friedman said. “They don’t evolve it, they don’t innovate. They kind of get a model of we’re going to open 20 of these a year, 40 of these a year, and pretty soon you blink and seven years goes by and somebody has like a range of 100 to 300 stores, and they’re all kind of dated, and they’re all tired because there hasn’t been a focus of invention and innovation. There’s been a focus of rollout and duplication.”
Big year ahead
This rather apt description begs the question: What does RH have in store for 2025? The short answer includes RH Couture Upholstery by Dmitriy & Co. sometime in the first half of the year. The Dmitriy & Co. line was acquired in 2020 but to date has been available only to the trade. Add to this that in Friedman’s words is a brand extension possibly “worth as much as everything that we just did.”
We’ll have to wait for details, but Friedman told analysts that this extension “could be massively, massively accretive” and that it paradoxically “addresses the biggest part of the market” while at the same time anticipating “what we think is a trend that is coming.” Tantalizing.
Also on tap for 2025, as we have previously reported, are RH Paris and RH London galleries. And coming in 2026 will be RH Milan.
But let’s return to right now, which is to say, tariffs and the housing market. As is his forte, Friedman’s views on these fundamentals are somehow both provocative and plausible. First, tariffs, for which RH is already prepared, according to Friedman. The company has been shifting its sourcing out of China and, more recently, out of Mexico, as well. RH expects to be completely out of China by the end of Q2 this year, Friedman said.
That said, Friedman seemed to be cheering Trump on with respect to the incoming president’s tough talk on trade.
“Donald Trump is a great negotiator,” he said. “I think he’s looking at the world’s playing field and saying, ‘How do you use leverage?’ Negotiation without leverage is impersonation. And you better hope that they don’t find out you’re not who you are. So, he’s really good at using leverage. He’s done it before. We’re seeing him do it now. He hasn’t even taken office, and the ‘art of the deal’ is in full play right now.”
‘Sucks to be you’
And the housing market? Friedman said he would almost lament its rebound, because when times are tough, like really tough, the market winnows out a lot of the weaker fish.
“Quite frankly, sometimes I talk internally about, hey, I hope the housing market stays flat for another year,” he said. “We’ll have a lot less competitors if it does. We’ll gain a lot more market share if it does. So, I’m not necessarily enthusiastic about when the housing market comes back, because a bad housing market for a brand like ours, positioned the way it is, is actually kind of a good thing.”
Now in his 24th year at RH’s helm, Friedman would be forgiven for a bit of nostalgia, especially as ornaments and stockings were being hung. Not this guy. To his and RH’s credit, the view is confidently directed to the future.
To inflection and beyond!
