RH (RH +23%), a luxury home furnishing retailer, is experiencing a significant boost today after reporting better-than-expected earnings for Q2 (Jul), breaking a series of misses. The company had faced challenges due to tight monetary policy and a tough housing market, leading to seven consecutive quarters of declining year-over-year revenue. Additionally, RH's aggressive investment strategy put pressure on its margins.
However, demand trends turned positive last quarter, helping RH achieve sales growth in Q2. Notably, this positive momentum has continued into Q3 (Oct), suggesting that RH might have weathered the worst of the current economic downturn.
- Q2 numbers were relatively soft due to the challenging economic environment, described by CEO Gary Friedman as the toughest housing market in 30 years. Adjusted EPS dropped by 57% year-over-year to $1.69, with a modest 4% increase in revenue to $829.66 million. Demand grew by 7%, below RH's 8-10% prediction, but finished up 10% by July and strengthened in August. RH expects a 12-14% demand improvement next quarter.
- RH's aggressive investment during a downturn led to a more than 10-point contraction in adjusted operating margins year-over-year to 11.7%. However, Friedman stands by these investments, believing they position RH for long-term opportunities.
- RH's investment plans include opening new galleries, such as a Waterworks Showroom in California by Q4 and a Sourcebook with test mailing planned for 2025. RH acquired Waterworks in 2016 and believes it can grow to a billion-dollar brand. The company is also expanding in Europe, with launches in Paris and Milan over the next two years. Enhancing its online experience is another focus, with upgrades planned throughout the second half of 2024.
- The demand environment remains challenging, and RH does not expect significant changes until interest rates ease. However, the company believes demand trends will continue to accelerate through the rest of FY25 and into FY26. Despite this, revenue will lag demand due to new collections and reduced backorders. Consequently, RH lowered its FY25 revenue growth outlook to 5-7% from 8-10%. Analysts had already anticipated this and adjusted their models accordingly.
Leading into Q2 results, RH's peers had issued warnings. Wayfair (W, Financial) noted cautious consumer spending in JunQ, Williams-Sonoma (WSM, Financial) reduced its FY25 (Jan) comp and revenue guidance due to economic headwinds, and La-Z-Boy (LZB, Financial) provided bearish OctQ guidance. By delivering strong numbers and projecting continued positive trends, RH alleviated investor concerns and saw a significant stock price surge.
