RH (RH 6.94%) CEO Gary Friedman doesn't pull any punches when he talks about the economic climate facing his company, the high-end home furnishings retailer formerly known as Restoration Hardware. For about a year, Friedman has called out the challenges in the housing market and in the economy, pointing to a dramatic shift in consumer shopping habits and the business.
Indeed, RH posted declines in both revenue and profits in its recently released fourth-quarter earnings report. Revenue in the quarter fell 15.5% to $772 million and adjusted earnings per share were nearly chopped in half, falling from $5.66 to $2.88.
The stock slipped 3% on the report as the company also said it expected business conditions to be challenging in 2023 as well, due to weakness in the housing market, the recent banking crisis, backlog reductions, and difficult comparisons with the pandemic boom.
For 2023, the company expects revenue of $2.9 billion to $3.1 billion, down 17% from 2022, and it called for an adjusted operating margin of 15% to 17%, compared to 22% in 2022. That translates into adjusted operating profit falling by about a third.
The good news for investors is that those headwinds seem to be already priced into the stock, as RH shares are down by nearly 70% from their peak in 2021.
However, the company is also in the process of reinventing itself, and could soon be in a much different position than it is today.
A European expansion
The company is preparing its expansion into Europe, launching its first gallery in the U.K., opening RH England at a 73-acre, 17th century estate known as the Historic Aynho Park. The gallery will include three restaurants, as well as a wine lounge, tea salon, and juice bar.
The new location will be much more than a gallery. It's an experience designed to showcase RH's repositioning as a lifestyle luxury brand centered on the home, but also offering restaurants and hotels, private jets and yachts for rent, a streaming service focused on architecture and design, and fully furnished homes that it plans to sell turnkey.
RH plans to follow up that opening with several more galleries in Europe, including capitals like Paris, London, Milan, and Sydney.
The company said that investment would lower its adjusted operating margin by 150 basis points, but it could deliver serious returns down the road, as Europe has long been a top market for luxury goods.
Where RH will be in 3 years
Friedman is a visionary thinker and aims to "scale taste," making the company the arbiter of taste for the home. As part of that goal, the company made a pair of acquisitions to launch to-the-trade custom upholstery and furniture companies.
And its recent move into services like a guesthouse and restaurant shows the company making a play to become a broad lifestyle brand, rather than just a home furnishings seller.
Home furnishings will drive the majority of the company's revenue for the foreseeable future, but the upshot of these changes and investments is that RH could evolve into a much different company.
Just a few years ago, the company shifted its sales model from a promotional one to a membership model. Though Wall Street was initially skeptical of the move, it turned out to be the right decision, and the stock surged after the pullback.
As for the business, its performance in three years will depend on the macroeconomic environment. But there's a good chance it will be in a better position then, as the company is getting hit by multiple headwinds at the moment.
In spite of those challenges, RH still expects to report an adjusted operating margin of 15% to 17% this year, a solid number for almost any retailer.
If it can do that in a bear market with rising interest rates and a sustained pullback in housing prices, investors should be rewarded when the economy rebounds.
