Company Reports

RH has gained share in the fragmented $134 billion (US Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into international markets, the $200 billion hotel industry, and $1.7 trillion domestic housing market should help support 8% top line growth over the longer term.

No-moat RH has been forthright about its headwinds in recent quarters: higher interest rates limiting home sales turnover, increased discounting from peers, and now delayed shipments because of geopolitical strife around the Red Sea. These factors led to a stunted fourth quarter, with sales of $738 million (down 4%) and an adjusted operating margin of 9.1%, down 750 basis points year over year. This is well below the roughly 15% the firm had implied, hindered by expense deleverage, markdowns, and higher investments. We think RH is operating on the offensive against a struggling industry, outperforming the furniture and home furnishing market that saw sales decline at an average of 10% over the past six months of RH’s fiscal year. Relative outperformance indicates share gains are accruing as a result of the firm’s investment to elevate the brand.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

RH has gained share in the fragmented $143 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into international markets, the $200 billion hotel industry, and $1.7 trillion domestic housing market should help support 8% top line growth over the longer term.

No-moat RH continues to face a housing market plagued by limited inventory, high interest rates, and declining affordability. Although sales were expected to fall in the back half of the year, an increasingly promotional home furnishing industry is pressuring profits for retailers more than anticipated. In line with our forecast, RH’s third-quarter sales contracted 14% to $751 million, following a 14% decline in the year-ago period. We believe that the recent slowdown is a function of the economic environment rather than flawed merchandising, and that the outlined opportunity set (design studios, international expansion, housing, and more) should offer RH the ability to capture 8% average sales growth over the longer term. Already the firm’s outlook implies that material declines are in the rearview mirror, with the fourth quarter aiming for flat year-over-year sales performance.

RH has gained share in the fragmented $143 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into international markets, the $200 billion hotel industry, and $1.7 trillion domestic housing market should help support 8% top line growth over the longer term.

No-moat RH’s top line continues to struggle due to a sour housing environment that has been hindered by high mortgage rates and limited turnover, resulting in a furniture and home furnishing industry average sales decline of 7.2% in its last quarter. Luxury housing-related spending wasn’t spared, as evidenced by RH’s second-quarter sales decline of 19% (to $800 million), which modestly edged our negative 22% forecast. However, an adjusted operating margin of 20.2% significantly exceeded our 14.5% outlook, helped by $40 million of marketing spending that was reallocated to the third quarter. As such, RH is poised for a midteen sales decline and an operating margin of 8%-10% in the current quarter, a massive compression (roughly 1,200 basis points) that likely accounts for shares tumbling 8% in postmarket trading. Fortunately, the third quarter appears to be the trough in sales and profit pressure, as the implied fourth-quarter guidance includes flat sales (down 8%, excluding the 53rd week) and a 15.5% operating margin at the midpoint. With the 2023 outlook largely unchanged, we don’t plan any material change to our $312 fair value estimate and view shares as modestly overvalued.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

RH has gained share in the fragmented $143 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into $200 billion hotel industry and $1.7 trillion domestic housing market should help support high-single-digit top line growth over the longer term.

We plan to lower our $327 fair value estimate for no-moat RH by a mid-single-digit rate to account for significant near-term profit pressures, but still view the current market price as an attractive entry point. Although fiscal first-quarter results surpassed our expectations—with sales of $739 million and an adjusted operating margin of 14.9% edging our $728 million and 14% forecasts, respectively—they were a material step down from results during the pandemic era. More specifically, its sales fell 23% and operating margin compressed 980 basis points year over year (hurt both by discounting on the gross margin line and cost deleverage on the operating expense line). Even so, RH’s first-quarter sales were still 23% higher and its operating margin was more than 300 basis points wider than in 2019’s first quarter, displaying the structurally higher earnings power of the business as it has evolved.

RH has gained share in the fragmented $143 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into $200 billion hotel industry and $1.7 trillion domestic housing market should help support high-single-digit top line growth over the longer term.

We plan to lower our $375 per share fair value estimate for no-moat RH by around 15%, with the expected contraction in 2023 sales and operating profit accounting for most of the change. RH offered a full-year outlook including sales of $2.9 billion-$3.1 billion, implying a midteen downtick, and an operating margin of 15%-17%, representing a roughly 600-basis point contraction. This outlook is significantly below our 3% sales growth and above-20% operating margin forecast for 2023, which we now plan to adjust closer to the expected ranges. Given rising interest rates over the past year and dire existing home sales of units over $1 million (which have averaged 38% declines over the last three months, according to National Association of Realtors), correlated spending on home furnishings is slowing. That said, we don’t think demand has permanently evaporated or been reallocated to lower-price offerings; rather, we think such spending has been postponed until equity markets (where significant household wealth is held) and interest rates (for mortgage costs) stabilize.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

RH has gained share in the fragmented $118 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers nationally compete, leading to incremental market share gains from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and pricing consistency, but the diverse end-market expansions RH is pursuing could make it tough to capture a cost advantage. Entry into $200 billion hotel industry and $1.7 trillion domestic housing market should help support high-single-digit top line growth over the longer term.

No-moat RH printed third-quarter results that were better than we expected, despite uncertainty surrounding the macroeconomic environment. Sales of $869 million and adjusted EPS of $5.67 outpaced our $865 million and $5.10 respective projections. Although sales fell 14%, they were 28% above the same period in 2019, exhibiting the success RH has had in expanding its total addressable market via both gallery design and hospitality, as well as other new brand building concepts (Guesthouse, for one). While adjusted gross margin contracted 50 basis points, to 49.7%, we favor occupancy cost deleverage over merchandise margin pressure (discounting), as firm pricing signals brand status to consumers. The adjusted operating margin of 20.8% was nearly 700 basis points lower than last year, with 200 basis points of pressure from product launch initiatives, but it was 180 basis points above our forecast. Positive sentiment around third-quarter performance was tempered by a cautious fourth-quarter outlook that implied low-double-digit sales declines and more than 800 basis points in operating margin contraction, indicating RH has not yet escaped hesitant consumer spending patterns. Given this offset, we don’t expect any material change to our $383 fair value estimate and view shares as attractive, trading at a 30% discount.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

RH has gained share in the fragmented $118 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers have scale, helping capture incremental market share from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and consistency of pricing, but the diverse end-market expansions RH is pursuing could make it difficult to capture a cost advantage. Entry into $200 billion hotel industry and $1.7 trillion domestic housing market should help support high-single-digit top line growth over the longer term.

We don’t plan any material change to our $390 fair value estimate for no-moat RH after digesting its second-quarter results. Sales of $992 million were flat, better than the 1%-3% anticipated decline leadership provided in June (we had forecast a 1% fall), as consumer concern around the economic environment became heated. More impressive was RH’s ability to generate a nearly 25% operating margin, above the 23.5% we had forecast and the 23%-23.5% the firm expected, thanks to the whopping 340 basis points in gross margin expansion it captured via strong product pricing. This helped offset operating expense pressure attributable to significant launches (for example, Guesthouse, San Francisco, Contemporary). But the outlook for the third quarter leveled excitement around second-quarter outperformance, as RH expects a sales decline of 15%-18% with a 18.5%-19% operating margin, below the 9% sales downtick and the 20.5% operating margin we had forecast for the period preprint. Even with a less sanguine outlook over the near term, we view shares as significantly undervalued, trading at a more than 30% discount and less than 11 times our 2022 EPS estimate.