RH (RH, Financial) is an American luxury lifestyle retailer that specializes in furniture, lighting, textiles, rugs, bathware, decor, outdoor and garden products, as well as baby and teen products. On Sept. 8, RH reported fiscal second-quarter earnings, beating analyst estimates for both revenue and earnings as consumer spending on home improvement remained strong throughout the quarter.
RH shares were up 3.3% in after-hours trading following the news of the company’s stellar second-quarter performance as well as the positive full-year guidance. Shares gained another 7% on Sept. 9 as investors weighed in the positive direction the company is moving in. The company expects the demand for its luxury products to continue to rise in the coming quarter.
Second-quarter earnings recap
The company reported revenue of $989 million for the fiscal second quarter, up 39.5% year-over-year, driven by rising housing demand and exceptional fiscal and monetary policy support from policymakers. For the second quarter, adjusted net income came in at $252 million, up 105% from the previous year. The company reported earnings per share of $8.48 against expectations for just $6.51. Adjusted Ebitda was $290 million and free cash flow came in at $95 million.
Luxury lifestyle and fashion brands continue to benefit from so-called "shoptimism" despite the global economic downturn. Lee Eisenberg coined the term shoptimism in his 2009 book "Shoptimism: Why the American Consumer Will Keep Buying No Matter What." In his book, he proposed two types of customers: one that perfectly fits the classic economic theory of rational buyers, and the other, whom Lee dubbed romantic buyers, who buy something to satisfy their emotional needs.
Consumer spending on non-essential items has increased as retail therapy is a common way to deal with stress because it reinforces a sense of personal control over our surroundings. On the other hand, the pandemic has resulted in significant changes in many people's lifestyle choices, with people choosing to stay at home more often and spend more time interacting with the world digitally through social media.
The new generation of content creators has pushed the concept of “romanticizing life,” which has influenced consumers to move from the hustle and bustle of city life to somewhere more serene and quiet that matches their aesthetic tastes. The concept was originally intended to encourage people to live in the moment, but as remote working gained traction, individuals are increasingly preferring to relocate to the countryside, not just for the aesthetic but also because living farther away from cities will get you more house for your money. This massive shift in lifestyle choices will help RH in reporting strong earnings growth in the next few years as the company has uniquely positioned itself as the go-to home furnishing company to cater to the aesthetic furniture tastes of the affluent community. The management also highlighted that consumers migrating to suburban areas have resulted in them purchasing larger houses, which is also driving the demand for furniture.
Outlook
Taking all this into account, RH boosted its full-year guidance. The company expects revenue growth between 31% to 33% in fiscal 2022, up from its prior forecast for growth of 25% to 30%. In the spring of 2022, the company plans to introduce RH Contemporary products and start delivering RH Interiors & Modern Source Books, which have not been mailed since the spring of 2020. The opening of RH England, the Gallery at Aynhoe Park, which is a 73-acre historic estate designed in 1615 by Sir John Soane, is also scheduled for mid-2022. RH also plans to debut its first RH GuestHouse in New York for travelers seeking privacy and luxury, as well as the launch of the World of RH, a digital portal showcasing RH's integrated ecosystem of products, places, services and spaces.
Although the demand for RH’s products appears to be strong, the company is still facing supply chain challenges with the increasing number of Covid infections around the world. The management highlighted that the Vietnamese government recently ordered the closure of manufacturing facilities owing to the rapid spread of the Delta variant, which interrupted production. In October, the company plans to start manufacturing in Vietnam once again, with full production expected by the end of the year. The global supply bottlenecks have also increased the prices of some of RH’s products as the prices of raw materials have increased sharply along with transportation headwinds such as longer transit times and increased transportation expenses.
Despite the ongoing challenges, I believe RH is well-positioned to benefit from the increased consumer spending on houses and home improvement. Even on the back of a triple-digit stock price appreciation in the last 12 months, RH still seems to be a good pick for growth investors.
