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RH CEO: ‘There Are Those With Taste and No Scale, and Those with Scale and No Taste’

It has been a year of growth for high-end furnishings retail behemoth RH.

After launching several new ventures earlier this year—RH Contemporary, RH Guesthouse and RH San Francisco—the company announced a better-than-expected third quarter, along with the acquisition of two furniture companies.

RH acquired Dmitriy & Co, a to-the-trade custom upholstery atelier, and hired its founders, Donna and David Feldman, to create RH Couture Upholstery. RH also picked up Jeup, Inc., a to-the-trade custom furniture atelier and hired Joseph Jeup to create RH Bespoke Furniture. Along with those acquisitions, RH also hired Margaret Russell, former editor in chief of Architectural Digest and Elle Decor, to create RH Media, an editorial-content platform highlighting people and ideas shaping the world of architecture and design.

According to RH CEO Gary Friedman, the moves were made to better position the luxury company to capture a larger share of the interior designer market, which has grown exponentially in recent years.

“Today’s announcements, plus our previous acquisition of Waterworks, firmly plant four RH flags at the very top of the luxury mountain, and clearly state our intention of establishing RH as an arbiter of taste and design in the to-the-trade, luxury home furnishings market,” he said in a statement last week. “These brands and businesses, thoughtfully integrated and amplified on what we believe will be the world’s most innovative and dynamic global design platform, will begin to fundamentally change the landscape of the interior design industry.”

Along with the announcement, RH reported third-quarter net revenues that were better than expected, but still down from last year, at $869 million versus $1.006 billion in 2021. But this quarter’s revenue was up 28 percent versus the same quarter in 2019, when net revenues were $678 million.

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RH’s gross margin contracted 50 basis points, which Friedman said was due to fixed occupancy deleverage, partially offset by an increase in product margins as the company continues to resist catching the “irresponsible” promotional bug that’s infecting the broader retail business.

“If your strategy is to stand for price, then maybe that’s an okay strategy,” he said of how others in the home business are sending “30 e-mails” a week pushing discounts. “Our strategy is to stand for design and quality and innovation. So it’s positioned the company around product, not price.”

Friedman doubled down on his dismay at the “widespread discounting” that’s rampant in the industry. “And while it’s been almost two years since we’ve deployed a promotional email, we’ve been receiving two sale emails per day for many home furnishings retailers,” he told investors during the company’s earnings call. “Although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there is certain long-term risk of brand erosion and model destruction for those who choose the promotional path.”

Friedman said the company “is moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences—fully furnished luxury homes, condominiums and apartments with integrated services, that deliver taste and time value to discerning time-starved consumers.”

RH posted a 20.8 percent adjusted operating margin in the third quarter, which also exceeded its outlook despite the dramatic slowdown in the housing market. Those results were inclusive of investments related to the launch of RH Contemporary, RH Guesthouse, the development of RH International, and the rollout of RH In-Your-Home, which led to approximately 200 of the 640 basis points of adjusted SG&A deleverage in the quarter. Additionally, the company experienced adjusted SG&A deleverage due to lower revenues versus a year ago.

RH generated $102 million of adjusted free cash flow in the third quarter, ending the period with $12.5 billion in cash on its balance sheet, total net debt of $375 million, and trailing 12-month adjusted EBITDA of $1 billion.

Looking at the remainder of fiscal 2022, Friedman said the company expects revenue growth of negative 3.5 percent to negative 4.5 percent versus our prior outlook of negative 3.5 percent to negative 5.5 percent and adjusted operating margin in the range of 21.5 percent to 22 percent versus our prior outlook of 21 percent to 21.5 percent.

“We expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve’s anticipated monetary policy and the cycling of record Covid-driven sales and backlog reductions,” Friedman said.

He also seemingly took a veiled jab at competitors when he said “there are those with taste and no scale, and those with scale and no taste,” suggesting RH is best equipped to climb the “luxury mountain” and build a “brand with no peer.”

“Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain,” he said. “Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We do have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect.”

So far, the company has fielded an “incredible” response to the opening of RH Guesthouse, it’s initial foray into the hospitality industry. “Right now, it’s really positioned to be something that helps redefine the brand and have people look at us differently,” Friedman said. “I think it demonstrates the kind of creativity and passion and attention to detail to do something extraordinary. People from the hospitality industry have come and seen it and toured it. Luxury CEOs that have come and toured it, said they haven’t seen anything like it anywhere in the world. So, we just let it kind of unfold here.”

The CEO is all too aware, however, that RH faces an uphill battle with so much economic turmoil rattling consumers, warning that the spending climate and market “will get worse before they get better.”

“If you look at the housing industry and track the housing industry and if you track the performance of home furnishings retailers against past housing downturns, that would tell you things are going to get worse before they get better here,” he said.

“The housing industry is in a free fall,” he continued. “I think the National Association of Realtors just reported that housing demand was down 37 percent in October. We’ve never—at least in my lifetime, I’ve never seen interest rates rise so quickly. I don’t think anybody on the phone has either and the impact on the housing market, especially when you look at it versus the housing market that was overinflated and run up by Covid, you’re going to have some wild swings here.”

CEO’s take: Friedman acknowledged the next couple of quarters may be bumpy for RH as pandemic-related issues continue to be worked out, but he’s confident about the company’s long-term potential.

“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, we believe our long-term investments will enable us to continue driving industry-leading results,” he said.

Those investments include RH’s largest-ever product introduction across its lines in 2023, along with European expansions into England, France and other countries in 2024-2025.

Additional reporting by Jessica Binns.