Two months after downgrading its fiscal outlook for the remainder of 2022, RH had good news for investors on its second-quarter earnings call, reporting 0.3 percent revenue growth for the quarter.
In July, CEO Gary Friedman said the home furnishings giant expected a 1 to 3 percent revenue decline in the second quarter due to softening demand and increases in interest rates. Instead the company increased revenues to $992 million versus $989 million last year, and a 40 percent increase over two years ago.
Friedman credited faster backlog relief for the bump, but chief financial officer Jack Preston said the California company still has work to do to burn through excess inventory.
“Relative to that $200 million we originally noted at the beginning of the year, we still have that work left ahead of us,” he said. “And while supply chain constraints and other things are easing, they’re still not back to—if there’s a level of normal, if we all believe 2019 pre-pandemic is normal—they’re still not there.”
Friedman also pointed to the company’s reluctance to discount despite many home goods retailers slashing prices to clear through excess inventory. That strategy gave RH a gross margin expansion of 350 basis points for the quarter.
“While there may be short-term risk of market share loss as a result of our choice not to promote, we believe there are certain long-term risks of brand erosion and model destruction once you begin down that path,” Friedman said. “It’s that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry, and our results continue to reflect those of the leading luxury brands as we delivered 24.7 percent adjusted operating margin in the second quarter, also exceeding our outlook.”
Those results are inclusive of the company’s investments in the launch of RH Contemporary, the opening of RH San Francisco, development of RH International and RH Guesthouse, which launched this week with the opening of the company’s New York hospitality concept.
The property features six guest rooms and three guest suites, along with Friedman’s private residence occupying the entire top floor, which is sometimes available for booking. Each guest rooms and suite includes two full bathrooms, a gourmet pantry, an in-room gym and exclusive use of the private rooftop garden, pool and dining terrace with panoramic views of downtown New York, Freedom Tower and the Hudson River. The Guesthouse also offers two dining options—The Dining Room & Terrace, a live-fire restaurant, and The Champagne & Caviar Bar, housed in the cellar.
Friedman said the restaurant concept, which also operates in the RH San Francisco gallery, will expand to additional locations in North America and Europe. Likewise, the Champagne & Caviar concept will land in galleries in Paris, London, Milan and Aspen in the future. Friedman also said the company’s luxury yacht, the RH3, is available for charter in the Mediterranean and Caribbean, and its customized Gulfstream jets will lift off later this year.
“Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of products, places, services and spaces that establishes the RH brand as a global thought leader, taste and place maker,” Friedman said.
Operating income dropped nearly 6 percent to $234.4 million from $249 million a year ago. Net income dropped 46.1 percent from $226.7 million in the second quarter of 2021 to $122.3 million this year.
RH generated $23 million of free cash flow, ending the quarter with $2.1 billion of cash, total net debt of $446 million and trailing 12 months adjusted EBITDA of $1.1 billion. The company purchased 1 million shares of common stock in the second quarter at an average price per share of approximately $255. RH also spent $82 million in cash to repurchase $18 million and $39 million of the 2023 and 2024 outstanding convertible notes in privately negotiated transactions.
Looking forward, Friedman said the company expects third quarter net revenue in the range of down 15 to 18 percent, with adjusted operating margin in the range of 18.5 to 19 percent. Fiscal 2022 net revenue growth is estimated in the range of down 3.5 to 5.5 percent with an adjusted operating margin in the range of 21 to 21.5 percent. Once again, he pointed to softer demand and anticipated interest rate increases for the declines.
Friedman also said RH will hold off on opening both RH England and RH Palo Alto to 2023, citing construction and approval delays.
CEO’s Take: While acknowledging potentially choppy waters ahead, Friedman said RH is in a position to weather short-term storms and continue its growth trajectory not only in retail, but in hospitality, as well.
“While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift and shed less valuable market share as we continue to raise our quality and navigate through the multiple macro headwinds, we believe our long-term investments will enable us to continue driving long-term industry-leading performance,” he said.