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RH CEO: ‘Retail Mall Is Like a Graveyard for Short-Lived Ideas’

RH is not on a “year-to-year or quarter-to-quarter journey,” CEO Gary Friedman told investors Thursday in a conference call. Rather, the upscale home furnishings chain is pursuing a “decade-to-decade” roadmap “trying to build a brand with no peer and trying to build something that’s truly sustainable in this world,” he pointed out.

The home goods retailer posted another quarter of growth for the first period of fiscal year 2022, which closed April 30.

Despite softening consumer demand, RH increased net revenues by 11 percent from $861 million in the first quarter of 2021 to $957 million this quarter. That’s a 98 percent increase versus the same period in 2020, and it reinforces Friedman’s laser focus on building the company for the long haul.

“I joke around some times when I say a retail mall is like a graveyard for short-lived ideas, because most retail brands don’t live out the life of their lease,” he said.

The Bay Area seller of $10,000 sectional sofas and $1,999 silk and cotton bedding sets “made some critical choices at the beginning of Covid,” said Friedman, who shrugged off those who insisted the home boom would be anything but “temporal.”

“I had people tell me, ‘it’s the decade of home. It’s going to be always like this,” Friedman said. “And I said, ‘look, I’ve been in this industry a long time, nothing’s always like anything. Everything is always changing.’ And our view is the Covid lift was going to probably last a year, and it got extended by another year, because of all the variants.”

Though “we’ve had a very chaotic couple of years,” Friedman said RH took a “very different” approach to the pandemic by “decid[ing] not to try to optimize the period of COVID.”

“We decided not to chase revenues and chase demand during that period. We said, ‘look, there’s already more demand than we could fulfill. Why don’t we use this time in a much more strategic way and focus on moving some really big rocks that will set up the next decade of growth at our age?'” he added.

For RH, that meant focusing “all our energy on kind of taking [RH Contemporary] to another level,” Friedman said, referencing the company’s newest brand, which he describes on the RH website as “the most compelling new brand is our history” with Italian upholstery and Savile Row fabrics. The company still mailed catalogs, or what it calls Source Books, during the pandemic but without any new product filling the pages. Even in the absence of newness and marketing, “we outperformed everybody in our sector,” with 42 percent two-year growth over Covid, he added.

Net income improved 54 percent to $201 million from $131 million in 2021. Adjusted earnings per share outpaced the consensus mark of $5.46 by 42.5 percent, coming in at $7.78—a 59.1 percent increase over last year.

Friedman said the quarter’s results included investments related to the openings of RH San Francisco and the RH Guest House, as well as development of RH International and the rollout of RH In-Your-Home, which led to approximately 200 of the 270 basis points of base SG&A deleverage in the quarter.

Friedman said the company is forecasting SG&A as a percentage of revenue to peak in the second and third quarters.

RH generated $107 million of free cash flow in Q1, ending the quarter with net debt of $166 million, $2.24 billion of cash on its balance sheet and trailing 12 months adjusted EBITDA of $1.13 billion. The company spent $481 million in cash to repurchase $180 million worth of outstanding affordable notes, terminate all of the 3.4 million outstanding warrants, and unwind the remaining bond hedges. Following these transactions, RH has $101 million of convertible notes outstanding.

Looking forward to the remainder of the year, Friedman said RH has experienced softening demand trends, which began at the time of the Russian invasion of Ukraine and have further slowed during market disruption over the past several months. Based on current trends and the uncertain macro environment, the company gave a revised outlook for the second quarter and fiscal 2022, with net revenue in the range of minus 1 to minus 3 versus up 39 percent last year, with adjusted operating margin in the range of 23-23.5 percent versus 26.6 percent a year ago. Fiscal 2022 net revenue growth is forecast in the range of 0-2 percent versus up 32 percent last year, with adjusted operating margin in the range of 23-24 percent versus 25.6 percent a year ago.

CEO’s Take: Friedman acknowledged the slowdown of Covid-induced demand for home goods, but said he believes RH will be able to overcome that and other challenges to remain on its upward trajectory.

“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, 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 industry-leading performance,” he said.

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