RH Remains Stalled In Its Climb Up ‘Luxury Mountain’

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In RH’s first quarter 2024 report to Wall Street, CEO Gary Friedman tried to put a positive spin on otherwise depressing news – the lipstick-on-a-pig metaphor comes to mind.

For years, Friedman has defined the long-term vision for RH to “climb the luxury mountain,” but it reached its peak in fiscal 2021 with revenues of $3.8 billion. And it slid back to $3 billion in fiscal 2023 and keeps falling.


On a positive note, demand for RH home furnishings rose 3%, but that missed previous guidance. And its topline revenues beat expectations, even improved following revenues down 4% in fourth quarter 2023 and off 16% for the year. Yet, year-over-year revenues of $727 million were still down 2% from $739 million last year.

It was at the company’s bottom line where the news got ugly. With both cost of goods and selling, general administrative expenses up 5%, its net income plunged to a $3.6 million loss compared to a $41.9 million gain same quarter last year.

RH stock took a predictable dive, ending the week trading at about $230 a share, down from nearly $350 at the end of March and way under the $400 plus change high it hit last August.

Citing weakness in the housing market caused by elevated interest rates, Friedman asked investors to keep his long-term vision in mind. “While aggressively investing during a downturn has put pressure on short-term results, it also positions us to capitalize on long-term opportunities that present themselves during times of disruption and dislocation.”

He added, “We remain confident that our continued investments towards transforming our product and expanding our platform will generate significant long-term value for our shareholders,” as he promised more newness to come as RH doubles its Sourcebook circulation over 2023 and expands its $200 million kitchen and bath Waterworks subsidiary into the to-the-trade market.

RH will also extend its effective new store selling months from 12 in the second half of last year to 48 new store months in the second half of this year with the opening of five new North American Design Galleries, two in Europe (Madrid and Brussels) and a Palm Desert, CA Interior Design Studio.

Friedman held firm on the company’s full year guidance with demand growth in the 12% to 14% range and revenues up 8% to 10%, though he qualified that on a 52-week basis versus last year’s 53rd week which added $50 million in revenues.

For the year adjusted operating margin will range between 13% and 14% and adjusted EBITDA margin will fall in the 18% to 19% range. Currently adjusted operating margin is at 6.5% and EBITDA at 12.3%. The company did not respond to a request for comment.

Contemporary Can’t Carry The Load

Friedman last talked about the treacherous climb up luxury mountain in May 2023, but he continues to extoll his grand vision for RH. “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.”

Yet products remain the company’s cornerstone and its June 2022 launch of RH Contemporary – “the most compelling new collection in its history, representing a level of design and quality unseen before outside of the inaccessible To-the-Trade showrooms,” the company stated – was hailed as a milestone to establish RH’s luxury credentials.

Now two years in, Contemporary has been a disappointment. In the earnings call Friedman admitted some mistakes were made, particularly overestimating demand – “It’s a smaller market than we generally address,” he said – and overpricing the collection with a sectional at $24,000 – “We jumped too far.”

And while he earlier expected Contemporary to move the needle big time, he backtracked, saying the collection was presented to communicate “what we’re capable of as far as design and quality and use them in that sense, but not to drive the business.”

He admitted that a new number one collection that moves the business only comes around once every seven to 12 years. Despite high hopes, Contemporary isn’t it.

Newness Quickly Becomes Old

Friedman also emphasized the newness coming from Outdoor, Modern, Interiors and a second Contemporary introduction will all be in the top third of the company’s assortment and will “really pull the business forward.”

He explained the company looks at its assortment based upon a rule of thirds. “If you can introduce newness in the top third, that will lift the entire company. If you introduce newness in the middle third, you’re going to mostly be neutral, and if you introduce anything in the bottom third, you’re likely to pull down the company’s business. “

But suppose the expected newness doesn’t generate the expected lift, as with Contemporary. In that case, it’s left with excess inventory to move out through markdowns, which he admitted takes longer in the home furnishings business than in other categories.

“You always are going to have a higher degree of sale goods in a down market, always. And just because demand’s slower, you’re going to have more markdowns,” he said.

That ignores the fact that markdowns in the luxury sector are verboten because it pulls the brand reputation down. Louis Vuitton, Hermès and Chanel never have sales, ever.

International Shortfall?

As of yet, the company doesn’t report international sales, with a current footprint in only three markets, including Aynho Park, which is about two hours outside London and opened just a year, plus ones just opened in Madrid and Brussels.

While placing much store on the planned openings in London, Paris and Milan, Friedman was muted about results from its first international Aynho Park venture. “We’re where we thought we’d be,” as he said that initial opening was done through “a lens of conversation versus commerce.”

In other words, the idea was to introduce RH and get people talking, not necessarily buying. However, that won’t be good enough as it expands further internationally.

He also backtracked from a claim in June 2021 that RH is a brand with “worldwide recognition.” In this earnings call he said, “We’re opening in new countries. We’ve never sold there. You couldn’t even buy direct from our brand in any of those countries. So, why would anybody know RH?”

Hope Springs Eternal

The New York Times recently published an in-depth profile of Gary Friedman and the RH empire he has built. Full disclosure: I was interviewed journalist David Segal for the article where I acknowledged Friedman’s brilliance but also questioned whether his ambitions have run away with him.

Over the course of a nine-hour interview with Segal, Friedman said, “I don’t really talk about our vision for the company to Wall Street because they might lock me up,” adding, “Our vision is to create an endless reflection of hope, inspiration and love that will ignite the human spirit and change the world.”

Friedman’s backstory is truly inspirational, having risen from humble beginnings with a widowed mother who struggled with mental illness. After quitting junior college, he found his bearings in retail working as a stock boy for the Gap where he was taken under the wings of Mickey Drexler to become regional manager in Southern California. Then he went onto a stellar 14 years with Williams-Sonoma, including president of Pottery Barn.

He’s been chairman and CEO of RH since 2014, after joining the company in 2010 and taking a 10-month hiatus in August 2012 following an investigation into a potentially inappropriate relationship with an employee. And he has built a net worth of $1.2 billion, according to Forbes.

Friedman demands the same level of dedication and commitment among RH employees that he showed pulling himself up by the bootstraps. “Love us or leave us” is what he demands of employees.

Segal describes Friedman as the “head of a home-furnishings-based cult, complete with its own Bible (those 350-page glossy catalogs that turn up in your mailbox), terminology (“adventures,” “galleries,” “RH rules”) and catechism (”This is not our job, this is our life,” reads one of the RH rules.).”

Great companies are built by visionary leaders who can harness and direct the power of those who follow him or her. Friedman certainly has grand ambitions for RH and an enviable track record of accomplishment. However, one wonders if the skills of cult leadership can be – or should be – transferred to the corporate realm.

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