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A sluggish housing market, stubbornly high interest rates, inflationary pressures, and more recently, tariff-related risks, have combined to hammer shares of luxury home furnishings retailer RH (RH), which were down by 63% on the year heading into today's session. Good news has been hard to come by, but the company offered an encouraging update on one of those issues today, reminding investors that it shifted most of its China production to Vietnam and to its own factory in North Carolina. With Vietnamese leaders now looking to negotiate friendlier tariff terms with the U.S., this sourcing detail from RH carries some significant weight.

• Approximately 35% of RH's products were sourced from Vietnam last year, while about 10% were manufactured in the U.S. Vietnam, which has a trade surplus north of $120 bln with the U.S., had a tariff rate of 15% on many U.S. exports, compared to 25% tariffs from China. Vietnam is now expressing interest in lowering import tariffs on U.S. goods to zero, provided that the U.S. reciprocates for Vietnamese imports.
• If that scenario unfolds, RH will stand to benefit due to lower import costs for its products, especially in categories like wood furniture, textiles, and home decor. Lower import duties would directly reduce RH's cost of goods sold, which accounts for a significant portion of its total expenses. In FY24, COGS represented nearly 52% of total revenue.
• Consequently, RH's margins, profits, and free cash flow would improve. On that note, the company introduced its free cash flow outlook for FY25 this morning, guiding for $250-$350 mln in free cash flow compared to $(67.1) mln in FY24.
• RH's margins have spiraled lower recently, driven by rising raw materials costs and more aggressive pricing strategies amid a highly promotional retail market for furniture. In 2022 and 2023, RH's gross margin hovered in the low-50% range. More recently, though, RH has reported gross margin in the mid-40% area, including a mark of 44.2% in 4Q24.

Zero tariffs from Vietnam would significantly benefit RH by lowering its costs of imported goods, providing a positive lift to both RH's profitability and to investor sentiment, which has soured greatly this year.