Luxury home furnishings retailer RH (RH -16%) is under pressure after its third consecutive earnings miss in Q1 (Apr) and lackluster Q2 (Jul) revenue growth projections. Despite positive demand trends in Q1, RH operates in what it calls the toughest housing market in 30 years. With interest rates over 7% during the quarter, demand has softened. CEO Gary Friedman warned that fluid monetary policy will continue to impact the housing market through late 2024 and possibly into 2025.
While affluent customers are somewhat insulated from inflation and high interest rates, RH's recent quarterly results indicate a trade-down effect even among higher-income households. Lower-priced competitors like Williams-Sonoma (WSM, Financial) and Wayfair (W, Financial) have reported relatively stronger quarterly numbers, highlighting this trend.
- RH's Q1 revenue fell 1.7% year-over-year to $726.96 million, partly due to a weak housing market. The company also reported another bottom-line miss, with a net loss of $(0.40) per share, and adjusted operating margins at 6.5%, an 840 basis point decline year-over-year.
- CEO Friedman is optimistic about RH's investments, including the new RH Outdoor Sourcebook and RH Modern Sourcebook, launched earlier this month. He believes these will drive significant market share gains in the outdoor category and boost demand trends starting in Q2 and continuing through FY24 (Jan).
- RH is expanding into new markets both domestically and internationally. In Q1, it opened two international galleries in Brussels and Madrid and plans to open five North American Design Galleries this year. RH is also venturing into the North American housing market with RH Residences, offering fully furnished luxury homes and apartments.
- Despite these efforts, market conditions remain challenging, leading to a shaky outlook. RH forecasts Q2 revenue growth of +3-4%, missing analyst expectations. However, the company expects a stronger second half of the year due to its Sourcebooks, reiterating its FY25 revenue growth forecast of +8-10%.
Investors might have overlooked another Q1 earnings miss if Q2 guidance had been stronger. Placing too much emphasis on the second half of 2024 is not boosting investor confidence, especially as RH anticipates continued market challenges for the rest of the year. The company's reliance on new Sourcebooks to overcome economic headwinds may not be sufficient.
