Release Date: September 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- RH (RH, Financial) reported a 7% increase in demand for the second quarter, with positive momentum continuing each month.
- The company achieved revenues of $830 million, up 3.6% year-over-year, with an adjusted operating margin of 11.7% and an adjusted EBITDA margin of 17.2%.
- RH (RH) is gaining significant market share in North America and is laying the foundation for long-term global expansion, particularly in Australia and the Middle East.
- The company is making substantial investments in product transformation and platform expansion, which are expected to drive future growth.
- RH (RH) plans to open several new design galleries, including a 90,000-square-foot location in Newport Beach, California, and a 50,000-square-foot gallery in Raleigh, North Carolina, which are expected to be major brand-defining physical locations.
Negative Points
- The inflection in demand developed a couple of quarters later than expected, impacting short-term results.
- The company is facing pressure on short-term results due to aggressive investments during a downturn.
- RH (RH) is forecasting an increased backlog of approximately $80 million to $100 million, which will negatively impact adjusted operating and EBITDA margins by approximately 100 basis points for the year.
- Investments and start-up costs to support international expansion are estimated to be a 230-basis-point drag for 2024.
- The company is operating in a challenging housing market, which is expected to remain difficult until interest rates ease and the housing market begins to rebound.
Q & A Highlights
Q: With the inflection in demand trends driven by new product launches, how do you feel about product margins for the rest of the year?
A: Gary Friedman, CEO: We feel very good about the business right now. The inflection happened a couple of quarters later than expected, but the vector is increasing in magnitude and direction. We like where we are, with positive demand and margins, and multiple new galleries opening. We're focused on refining and elevating our strategy.
Q: Can you provide an update on the consolidation of the contemporary catalogs?
A: Gary Friedman, CEO: The consolidation was more about optimizing overall mailing depth and efficiency. We believe fewer, more meaningful books will help our brand break through the clutter and align with our strategy of immersive and brand-defining physical experiences.
Q: Are you at the point where 80% to 85% of the assortment is new, and do you need more newness in the second half of the year?
A: Gary Friedman, CEO: We have a lot of newness coming in the second half and throughout next year. By mid to late next year, we will be on a more predictable cadence. We will hit the 80-85% newness in the first half of next year, with significant new collections and an expanded assortment.
Q: How do you see the collections mixing into top, middle, and bottom tiers, and what is the potential aggregate demand lift from these actions?
A: Gary Friedman, CEO: The key is getting products into the top third, which pulls everything up. We have a lot of data and confidence in our outlook. The top third redefines the middle and bottom thirds, and we are seeing positive inflections in demand and margins.
Q: How do you view the trajectory of the international business, and how are the data points coming in as you lap the one-year mark?
A: Gary Friedman, CEO: The business is inflecting and heading in the right direction. Our design business and brand recognition are growing. The real conversation will happen when we open in key markets like London and Paris, which will significantly boost brand awareness and demand.
Q: How do you see the eventual recovery in housing impacting the furniture category spend across different income cohorts?
A: Gary Friedman, CEO: The key is the affordability gap. Once interest rates decline and home prices reset, we expect a significant benefit. The luxury housing market may react more quickly, and we are well-positioned to capitalize on this anticipated rebound.
Q: Can you provide an update on the progress of resetting your assortment and the potential lift it could have?
A: Gary Friedman, CEO: We are constantly refining and reacting to new data. We are excited about the steps we are taking and the potential lift from getting the right products in the galleries. This will significantly impact our mix and overall performance.
Q: How do you view the impact of promotions on demand, and are you in the latter innings of promotional activity?
A: Gary Friedman, CEO: We are in the middle of transitioning, and promotions are part of that. The key is the vector of our margins and demand. We are focused on refining our strategy and optimizing our business to reduce the need for promotions over time.
Q: How do you see the convergence of demand and revenue growth rates, and when do you expect this to happen?
A: Gary Friedman, CEO: We expect the convergence to happen by the end of next year as we regulate our cadence of newness and reduce back orders. The backlog will decrease, and demand and revenue growth rates will align more closely.
Q: How do you feel about the updated guidance and the factors contributing to the reduction?
A: Gary Friedman, CEO: The reduction is due to a combination of factors, including the time it takes for new products to marinate with consumers and the overall market conditions. However, we are seeing positive inflections in demand and margins, and we are confident in our strategic direction.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
