RH (RH) Earnings Preview: Navigating Market Challenges and Potential Opportunities

RH, a luxury furniture retailer, is set to release its second-quarter (July) earnings after the market close today, with a follow-up conference call scheduled for 5:00 p.m. ET.

The current consensus from FactSet points to adjusted earnings of $1.57 per share, a significant 60% decline year-over-year, alongside revenue expectations of $824.87 million, which would represent a modest 3% increase.

The company has forecasted Q2 revenue growth in the range of 3-4%.

A Challenging Economic Landscape

RH's performance has been hampered by a challenging economic environment characterized by high interest rates and a subdued housing market. Despite its positioning in the luxury segment of home furnishings, RH has not been immune to the broader economic downturn. CEO Gary Friedman has described the current environment as the most difficult housing market in three decades.

The negative impact of high interest rates has been felt across all income levels, resulting in dampened demand even within the typically resilient luxury goods sector.

In the previous quarter, RH made it clear that these headwinds are unlikely to dissipate soon. Friedman highlighted the uncertainty surrounding monetary policy, suggesting that the challenges in the housing market could persist through the end of 2024 and potentially into 2025. This cautious outlook was reflected in RH's Q2 revenue and demand forecasts.

Despite maintaining its full-year FY25 revenue growth guidance of 8-10%, investor sentiment has been lukewarm, largely because achieving this target would require a substantial uptick in demand in the latter half of the year—an outlook that does not fully align with management's own cautious commentary.

Industry-Wide Challenges

The broader home furnishings industry has also struggled under similar conditions, amplifying the difficulties RH faces.

Williams-Sonoma (WSM), a competitor in the high-end home goods market, recently reduced its FY25 revenue guidance, noting that it no longer expects a significant acceleration in the second half of the year. Similarly, La-Z-Boy (LZB) has issued cautious guidance for its Q2, citing a challenging macroeconomic and consumer spending environment.

Both companies have pointed to the continued pressure from elevated interest rates, which are impacting consumer spending across the board.

Signs of Positive Momentum

Despite the overall challenging environment, RH has identified some encouraging trends. In Q1, the company noted that demand trends turned positive and were building momentum.

This optimism is further supported by the launch of its new RH Modern Sourcebook, which was distributed to customers in early June. Management expects this initiative to drive stronger demand trends in Q2, forecasting an 8-9% increase in year-over-year demand—a noticeable improvement from the 3% growth recorded in Q1.

Additional Sourcebooks are planned for release in the second half of FY25, which could help sustain this momentum.

Strategic Expansion and Investments

RH is also pursuing strategic expansion initiatives, including the opening of five new North American Design Galleries and two international locations this year. However, these investments come with costs.

The start-up expenses associated with RH's international expansion are anticipated to create a roughly 200 basis point drag on adjusted EBITDA margins for the year.

While this represents a near-term challenge, the company believes these investments are crucial for long-term growth and market penetration, especially as it seeks to capture a more global audience.

Potential Shifts in Market Sentiment

The Federal Reserve's recent indications that it may soon ease its monetary policy have led to a decline in mortgage rates, which could provide a more favorable backdrop for RH and the broader housing market.

This potential shift has already benefited some homebuilders, such as luxury builder Toll Brothers (TOL), which has seen its stock price surge in anticipation of robust demand as interest rates fall.

If mortgage rates continue to decline, there could be a spillover effect into the high-end home furnishings market, potentially improving RH's outlook.

Stock Performance and Investor Sentiment

Since its Q1 earnings report in mid-June, shares of RH have shown some recovery from their lows but remain down about 20% for the year. This underperformance is more severe compared to peers like WSM and LZB.

A key catalyst for a rebound in RH's stock could be an upward revision of its FY25 guidance or a more optimistic outlook for Q3 (October). Providing such reassurances could help bolster investor confidence that RH's current FY25 targets are achievable despite the challenging environment.

Conclusion

RH is navigating a complex landscape marked by economic uncertainties and shifting consumer behaviors. While the company faces significant headwinds from high interest rates and a sluggish housing market, it is taking proactive steps to adapt to these conditions through strategic expansion and targeted marketing initiatives.

The potential for a more favorable interest rate environment and early signs of improving demand provide a glimmer of hope. However, much will depend on RH's ability to deliver on its guidance and demonstrate that its growth strategy can yield tangible results in a challenging macroeconomic climate. Investors will be closely watching today's earnings report for further clues on RH's path forward.