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RH CEO Has Never Seen Supply Chain ‘So Chaotic’

“Of course” the supply chain’s well-documented backlogs are affecting product launches, RH CEO Gary Friedman told Wall Street analysts last week, saying that he’s “never seen” such a “chaotic” sourcing and transportation landscape.

“Everything is a little out of sync in the world right now,” he said, “but everybody is dealing with it.”

Covid outbreaks in Vietnam and China pushed back the upscale furniture seller’s RH Contemporary launch from a March target date to sometime later this year, Friedman said. “I think we’re about a couple of months behind,” he added. “We want to be smart as we think about just the economic landscape we’re going into. If the economic landscape is volatile, you want to be careful especially if you’ve got a source book catalog business like ours—you don’t want to mail into a big headwind.”

Friedman said the RH Contemporary catalogue might now mail at 300 to 350 pages instead of 450 to 500, largely because “stuff is late.”

“I think many of us thought [the supply chain] would have … caught up by now. I mean, we’ll be lucky to be caught up by the end of the year,” he said, adding that the problems are “hitting everybody from all angles, all the raw materials, all the transportation issues, not just the transportation getting it to us. Our vendors [have] to get all of their components from all over the world shipped to them. So you just have this compounding supply chain kind of puzzle happening.”

Geopolitical conflict and rising inflation only exacerbate the drama involved with shipping freight by ocean, according to Friedman. “Product is on the water for a long time,” he said. “We’ve got generally about five extra weeks in our supply chain right now,” which translates to “a lot of time” and “a lot of money,” with some vessels running 10 to 12 weeks late.

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“When you run a an integrated business like ours, where you need all the pieces of the puzzle to paint the picture, that just makes it more complex and more difficult,” Friedman said.

The CEO also had a lot to say about what’s going on with “inflation like I’ve never seen.”

RH was just signing new ocean freight contracts when Treasury Secretary Janet Yellen said interest rates could return to 2 percent, Friedman pointed out. “I just wonder if anybody at the Fed has picked up the phone and called a business person and said, ‘hey, what do you think is happening with inflation? How’s ocean rates? How is this? How is that?'” he said.

“I mean, I don’t think anybody really understands what’s coming from an inflation point of view, because either businesses are going to make a lot less money, or they’re going to raise their prices,” Friedman continued. “And I don’t think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. I think it’s going to outrun the consumer. And I think we’re going to be in some tricky space.”

Despite the turmoil, RH reported another banner year in 2021. Net revenues increased 32 percent to $3.759 billion versus $2.84 billion a year ago, and up 42 percent over 2019.

The company’s adjusted operating margin reached 25.6 percent in 2021, up 1,130 basis points versus 2019. RH exceeded its adjusted operating margin outlook in the fourth quarter, reaching 25.2 percent versus 23.7 percent last year, and up 780 basis points on a two-year basis.

Working out some of the logistical kinks that have plagued the industry over the past two years has helped RH this past quarter and year. Friedman said the company generated $97 million of free cash flow in the quarter and $477 million for the year, inclusive of $191 million increase in inventory, of which approximately $60 million is due to increased transit times and the balance targeted to alleviate the company’s end ship demand backlog. RH ended the year with $90 million of net debt and nearly $2.2 billion of cash on their balance sheet, while generating ROIC of 73 percent in 2021.

Friedman also outlined RH’s plans for expansion in 2022, including a new store in San Francisco, the first RH Guesthouse opening in New York City, a new hospitality concept from the brand, in addition to launching the RH Contemporary line. On the hospitality front, RH also plans to get into restaurants, opening its Live Fire restaurant in San Francisco, along with food concepts at the New York Guesthouse.

“With average restaurant volumes approaching $10 million annually and a very profitable four-wall model, we are making significant investments to build a world-class hospitality organization,” Friedman said. “And we see endless opportunities to elevate and activate our places and spaces, creating integrated and inspiring experiences for our members and customers that cannot be replicated online.”

Hospitality is only one facet of RH’s plans for growth. Friedman also spoke about the debut of The World of RH, the first phase of the company’s digital portal that will highlight the breadth of its products and services, including charter jets and a yacht, which will be available for use later this year.

Looking at the first quarter of 2022, Friedman said that while sales and margins remain healthy due to the company’s ongoing rollout of its backlog, RH has experienced softened demand coinciding with the Russian invasion of Ukraine. With that in mind, Friedman said the company will remain conservative until trends return to normal.

Friedman shared the company’s outlook for first quarter net revenue growth in the range of 7-8 percent versus 78 percent in 2021, with an adjusted operating margin in the range of 23-23.5 percent versus 22.6 percent a year ago. Fiscal 2022 net revenue growth in the range of 5 percent to 7 percent versus 32 percent last year, with adjusted operating margin in the range of 25 percent to 26 percent versus 25.6 percent in 2021. The company’s outlook is inclusive of opening RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid-to-late summer and RH Palo Alto in the fourth quarter.

Net sales: For the quarter, net revenues grew 11 percent, and for the year, net revenues increased 32 percent to $3.759 billion versus $2.84 billion in 2021, and up 42 percent versus 2019.

“If you exclude money-losing online businesses, it represents one of the highest two-year growth rates in our industry,” Friedman said. “Demand versus 2019 grew 49 percent, which resulted in an incremental backlog at the end of the year of approximately $200 million of net revenues that we expect to fulfill over the course of 2022.”

CEO’s Take: “Everything is kind of happening at once, and I think you got to prepare for war. I mean, if you’re going into a very difficult, unpredictable time, you just got to be super flexible. You’ve got to be able to improvise, adapt, overcome and kind of be ready for anything,” Friedman said. “And I don’t mean that by playing defense. I mean, it’s by playing offense, but…I wouldn’t call it happy days right now. I’d call it pensive days. Be ready. And when we play like that, we usually have our best outcome. When we get overly optimistic, we have a higher likelihood to wind up in the ditch and get ahead of ourselves.”

Additional reporting by Jessica Binns.