RH (RH 0.43%) saw its shares surge after the luxury furniture company reported a surprise profit for the fiscal 2025 first quarter and indicated it was making progress moving more production out of China to mitigate tariff impacts. While some of the initial enthusiasm faded, the 7% gain RH posted on June 13 was still a much better day for the stock compared to the last time it reported quarterly results.
In early April, the company saw its shares plunge 40% following its fiscal 2024 year-end report, which coincided with President Donald Trump's "Liberation Day" tariff announcements. The company had already been dealing with a difficult home furnishings market, and new tariffs added another headwind.
The home furnishings industry saw a lot of demand pulled forward during the pandemic as homeowners focused on remodeling and decorating. Since then, higher interest rates have negatively impacted the remodeling market and led to less homebuying activity. Given that RH had been sourcing most of its furniture from Asia, a difficult environment just got tougher.
At the same time, the company is pushing forward with an aggressive European expansion. Instead of testing the waters, it's going big with elaborate showrooms in high-end, high-rent locations. It already has galleries in Aynho Park (England), Munich and Düsseldorf (Germany), Madrid (Spain), and Brussels (Belgium), with plans to open in Paris later this year and in London and Milan next year.
Despite the rally, the stock is still down more than 50% year to date. Let's dig into the company's recent results to see whether it's time to pick up shares while they're on sale.
A surprise profit
Given the environment, RH turned in a solid Q1. Its quarterly revenue rose 12% year over year to $814 million. Adjusted earnings per share (EPS) came in at $0.13, well above the analyst consensus calling for a $0.09 loss (as compiled by LSEG).
Gross margin was solid, edging up 20 basis points to 43.7%, though SG&A (selling, general, and administrative) expenses rose 15% and represented 36.8% of sales, compared to 36.0% of sales a year ago.
Merchandise inventories climbed 26% to $1.0 billion. When inventory growth far outpaces revenue growth, it can often be a sign of trouble, but the figure was down slightly from the end of fiscal 2024. The company plans to sell off the $200 million to $300 million in excess inventory it's carrying to raise cash.
Meanwhile, RH said that demand in its European markets continues to grow. On-premise merchandise and hospitality sales at its RH England gallery soared 47%, while its RH Munich and RH Düsseldorf galleries surged 60%. Management expects these sales at its RH England gallery to reach $37 million to $39 million in fiscal 2025. Online orders going to U.K.-based customers should add an additional $8 million this year. Given the gallery's location is in the countryside, RH thinks demand will be much greater when it opens the London location next year.
In addition, the company continues to shift its manufacturing out of China. It's now looking to manufacture 52% of its upholstered furniture in the U.S. and 21% in Italy by the end of fiscal 2025. It also expects a lot of tariff costs to be absorbed by its vendor partners.
Looking ahead, the company maintained its forecast for full-year revenue growth of 10% to 13% and an adjusted EBITDA margin of 20% to 21%. Q2 revenue growth should land between 8% and 10%.
Image source: Getty Images.
Can RH stock continue to rally?
There is no doubt the home furnishings market is extremely difficult right now, and tariffs only add to the pressure. However, RH's bold European expansion, which was a risk even in a good market for furniture, is showing solid signs of early success. That's very encouraging for when the market eventually turns.
From a valuation perspective, RH trades at a forward price-to-earnings ratio of 19 times analysts' estimates for the current fiscal year. That number falls to 13 based on fiscal 2026 estimates. That's not expensive, but the company did take on a lot of debt when it decided to aggressively buy back shares in 2017 and 2023.
All in all, RH is a high-risk, high-reward stock. The company has huge potential upside if it can weather the current market environment while executing on its European and U.S. expansion plans. However, investors need to weigh this potential upside against the risk of a macroeconomic downturn and the more than $2.5 billion of debt RH is carrying.
