Should investors be worried after RH lowered its forecast for the second time this month?
RH yesterday said that it was lowering its annual sales and profit forecast. It was the second time this month that the luxury furniture and furnishings chain has lowered its guidance.
“With mortgage rates double last year’s levels, luxury home sales down 18 percent in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year-end, our expectation is that demand will continue to slow throughout the year,” said Gary Friedman, RH chairman and CEO, said in a statement.
The chain is now looking for sales to decline between two and five percent for the year and operating margins in the 21 to 22 percent range. RH has left its guidance for the second quarter unchanged. It expects sales revenues to be down between one and three percent year-over-year against high comps. The retailer reported record revenues during the first quarter with sales increasing 11 percent to $957 million.
Mr. Friedman remains positive about his company’s prospects despite the macroeconomic speed bump in front of it.
“While we anticipate the next several quarters will pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality, and choose not to promote our business while we navigate through the multiple macro headwinds, we continue to believe our long-term investments will enable us to drive industry-leading performance over a longer-term horizon,” Mr. Friedman said.
RH’s shares took a hit as a result of its lower forecast but investors seem likely to stick with the chain.
William Blair analyst Daniel Hofkin rates the chain’s shares as outperforming its publicly traded peers.
“We continue to view RH as having a superior and highly differentiated business model within the branded consumer/retail space (and particularly within the fragmented luxury furniture market), with a substantially underpenetrated gallery footprint and open-ended long-term domestic and international growth potential,” Mr. Hofkin wrote in a note to investors.
RH in May opened its newest Gallery store in San Francisco. The 80,000-square-foot store, which covers five floors in the historic Bethlehem Steel Building, is described by the retailer as “a first-of-Its-kind design and dining destination.” The store features full floors of RH merchandise, an in-house interior design firm, the Palm Court Restaurant & Wine Bar and “a rooftop park with dramatic views of the San Francisco Bay, Bridge and skyline.”
- RH Updates Fiscal 2022 Outlook – RH
- RH Reports Record First Quarter 2022 Results – RH
- First Quarter Financial Results and Shareholder Letter – RH
- RH (RH) Q1 2022 Earnings Call Transcript – The Motley Fool
DISCUSSION QUESTIONS: Do you find a reason for concern based on RH’s latest lowered forecast or are you confident for the longer term based on its differentiated business model? How will higher mortgage rates and lower home sales affect the furniture and home furnishings market over the next year or two?
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12 Comments on "Should investors be worried after RH lowered its forecast for the second time this month?"
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Managing Director, GlobalData
It is worrying from the perspective that RH is clearly seeing further deterioration in the market that warrants a downgrade in its forecasts. However it is not alone in seeing this trend. Moreover, RH has a very unique business model that, over the longer term, will be fine. Plus it has plenty of opportunities for expansion both in the U.S. and overseas.
Founder, CEO & Author, HeadCount Corporation
I believe that earnings reports and outlooks like RH are going to become common for the foreseeable future. While some categories will remain strong, many discretionary categories are going to feel the impact of what already feels like a recession. Higher interest rates will naturally impact big ticket purchases but, as interest rates continue to rise, the impact will be felt more broadly. Overall, I’d say the next year or two look like they’re going to be tough sledding for many retailers – furniture and otherwise.
Co-founder, RSR Research
Is that why their unrequested massive catalog is “only” 300 pages this year vs. the typical 600?
I think they have a lot of lower-priced competition and, my recollection is, most of their locations are mall-based — which can be problematic.
I think the renovation industry will remain strong. Furniture — maybe not.
President/CEO, The Retail Doctor
This is temporary. People are indulging. Their stocks might be down but RH is still a gold-standard brand. I’m more concerned about their margins.
Chief Strategy Officer, Hoobil8
More than most retail sectors, furniture and home goods are directly tied to the performance of the housing market, which unfortunately isn’t looking to improve any time soon. But RH has seen hard times before and I’m confident they will find a way to navigate current global economic challenges. Boosting their offering of lower priced accessory items and creating smaller, more cost efficient stores to broaden their connection to more communities will help them navigate the next few years of uncertainty.
Founding Partner, Merchandising Metrics
Yes, RH investors should be concerned — short term. RH is a couple steps removed from IKEA when it comes to home furnishings, so if consumer spending is contracting at that level then that’s a pretty big red flag. Will RH customers spend now at a lower tier, or will they defer their spending until things bounce back?
Founder, CEO, Black Monk Consulting
Lowering forecasts are always a concern. And differentiated business models are, by definition, a step away from the mass market. So the real question is, will the luxury furniture market hold and, if it does, will RH remain an effective competitor? And the answer is, who knows? It all depends on how high interest rates climb, how bad inflation gets, if we enter a true recession, and for how long, and what unemployment looks like at the higher end of the pay scale. Obviously, RH is currently not as prepared as it should be for the disruptions we’ve already seen. It remains to be seen if they can correct this problem going forward.
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
This discussion relates to today’s discussion on the frugal consumer.
The question many more consumers will be asking themselves is, should I spend $5,000 for an RH sofa or spend $2,000 at West Elm and go on a nice vacation?
Principal, Cathy Hotka & Associates
RH’s affluent consumer may pull back a little bit, but will ultimately continue to feather their nests. The luxury consumer always continues to spend.
Founder, CEO, Black Monk Consulting
Totally correct. The question in my mind is whether or not RH can keep up with its luxury competitors.
Independent Board Member, Investor and Startup Advisor
Spending by wealthy individuals contributes significantly to the overall GDP. The rise of the financial markets post-COVID-19 crash created a strong wealth effect, contributing significantly to GDP growth in 2021 and the first half of 2022. However the broad stock market declines since the peaks of last November are beginning to impact high-end spending and the associated wealth effect negatively.
RH is an excellent window into future consumer demand in the luxury segment. In a related anecdote, for the first time in memory, the Neiman Marcus client advisors are beginning to offer discounts to their best customers for high-ticket purchases.
As to the future of RH, they are the premier luxury brand in their segment and have a massive global growth plan and opportunity ahead. They will survive this economic downturn (yes, recession) and thrive to all time highs in the next two to three years.
CFO, Weisner Steel
I don’t see the two issues as being really related; that is, the long-term model could be either wonderful or terrible, and it wouldn’t have much to do with their performance over the next year (the same could be said for practically any company on earth).
The relationship between home sales and RH I could see going either way: people might redecorate when they move, and thus the positive correlation would lead to negative results; OTOH not being able to move might encourage people to put more effort into upgrading where they are now.