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Luxury furniture and home decor company RH (RH) is reclining lower after issuing a downbeat sales update for FY23 (Jan) and announcing the restatement of a few quarterly reports due to errors in the calculation of GAAP net income per share.

• Regarding the former issue, the company is now expecting revenue to come in at the low end of its prior guidance range of (4.5)-(3.5)%, reflecting soft demand for expensive discretionary items and RH's reluctance to discount its furniture in a highly promotional environment.
• RH's decision to avoid entering price wars with other home furnishing companies, like Williams-Sonoma (WSM) or Wayfair (W), is meant to protect its brand name and its margins.
• To that end, RH has had some success as the company also stated that it expects FY23 adjusted operating margin to be towards the high end of its prior guidance range of 21.5-22.0%. However, that would still be well below the 25.6% figure that RH posted in a FY22 that featured record-setting sales driven by COVID-related spending trends, a hot housing market, and a less volatile stock market.
• In 3Q23, adjusted operating margin took a pretty big hit, sliding by 390 bps sequentially to 20.8%, while adjusted gross margin dipped by 310 bps to 49.7%. Based on those data points, it appears that RH did become a little more promotional towards the end of the calendar year, but likely not to the extent of competitors operating in the mid-to-lower tiers of the market.
• This resistance to materially lower its prices is coming at a cost. Specifically, RH is ceding some sales and market share to its competitors, which is apparent in its eroding top-line growth rate. Last quarter, RH's sales fell by nearly 14%, while WSM posted an increase of about 7%.
• RH's CEO Gary Friedman has repeatedly stated that these lower-value market share losses are worth sacrificing in order to avoid longer-term brand erosion. After a dreadful 2022 that saw shares plummet by about 50%, investors may finally be seeing eye-to-eye with Friedman on this perspective as the stock has jumped by nearly 20% in 2023.
• In regard to the restatements, RH noted that its financials for 1Q23, 2Q23, and 3Q23 should no longer be relied upon due to "material unintentional errors." The errors are related to how RH treated pre-tax losses on the extinguishment of debt, which therefore inflated its basic net income per share for these periods. For some perspective on the impact of this error, RH's GAAP net income per share for 1Q23 should have been $7.22, instead of the $12.16 it reported.
• Although this specific restatement doesn't affect RH's non-GAAP EPS, there appears to be more restatements on the way. In the SEC filing, RH also disclosed that it mistakenly used a 0% tax rate to compute non-GAAP EPS, reflecting its expectation for substantial tax benefits arising from stock option exercises by Mr. Friedman.
• However, the company now says that the modified tax rate will be higher than 0%, which will decrease its previously reported non-GAAP EPS. At this point, it's unclear how significant the changes to EPS will be. 

Overall, the restatements aren't a major issue from a fundamental perspective, although they don't exactly induce confidence in the company's executive team. Questioning the accuracy of a company's financials is never a comfortable situation for an investor, especially when that company is already contending with some fierce headwinds, as RH's revised sales outlook attests.