Story Stocks^®

Luxury home furnishings retailer RH (RH -16%) sits in the hot seat today after delivering its third consecutive earnings miss in Q1 (Apr) and projecting underwhelming Q2 (Jul) revenue growth. While demand trends turned positive during Q1, RH is operating in what it describes as the most formidable housing market in 30 years. Interest rates exceeding 7% during the quarter softened demand. CEO Gary Friedman cautioned that the fluid monetary policy will continue to weigh on the housing market through the second half of 2024 and potentially into 2025.

While an affluent customer base is better cushioned from the hardship of cumulative inflation and elevated interest rates, RH's recent quarterly numbers underpin a trade-down effect reaching even higher-income households. The company's lower-priced peers, such as Williams-Sonoma (WSM) and Wayfair (W), further illuminated this trend, registering relatively more uplifting quarterly numbers.

• Alongside a weak housing market, which kept total revenue growth in reverse in Q1, falling 1.7% yr/yr to $726.96 mln, has been RH's aggressive investing, which has only exacerbated short-term woes. The company registered another bottom-line miss in Q1 and its second net loss in three quarters at $(0.40) per share. Adjusted operating margins landed at the midpoint of RH's forecast at 6.5%, an 840 bp contraction yr/yr.
• Mr. Friedman is enthusiastic about RH's investments, including its new RH Outdoor Sourcebook, a collection of luxury outdoor furniture, and RH Modern Sourcebook, which went out to homes earlier this month. Mr. Friedman is confident that the launch of these Sourcebooks will result in significant market share gains in the outdoor category and accelerate demand trends beginning in Q2 and persisting throughout the rest of FY24 (Jan).
  • Another area of attention has been Waterworks, RH's luxury bath and kitchen brand it acquired eight years ago. The company wants to produce a Waterworks Sourcebook with test mailing plans in 2025. RH believes the banner can become a $1.0 bln global brand, five times its current value.
• RH is also expanding into new markets at home and abroad. During Q1, RH opened two international galleries in Brussels and Madrid. The company has plans to open five North American Design Galleries this year. Meanwhile, RH continues to target moving beyond the home furnishings market and into the North American housing market with the launch of RH Residences, fully furnished luxury homes and apartments.
• However, market conditions remain unfavorable, resulting in a relatively shaky outlook. RH projected Q2 revenue growth of +3-4%, missing analyst forecasts. Still, because of its Sourcebooks, the company anticipates a more robust back half of the year to compensate for immediate-term headwinds, reiterating its FY25 revenue growth prediction of +8-10%.

Investors might have been willing to shrug off another earnings miss in Q1 if Q2 guidance did not miss the mark. Placing too much weight on 2H24 is not instilling much confidence among investors today, especially given that RH continues to see challenging market conditions for the remainder of the year. As such, its reiterated guidance rests on the launch of new Sourcebooks, which may not be sturdy enough of a foundation to overcome stubborn economic headwinds.