RH warns that luxury housing will remain challenging amid higher mortgage rates

By Bill Peters

The retailer reported earnings results amid a recovery in the stock market but signs of weaker trends in furniture spending

Luxury furniture retailer RH on Thursday reported second-quarter results that topped estimates, but management warned that the higher-end housing market that the company depends on would likely remain rocky up ahead.

Shares of RH (RH), once known as Restoration Hardware, fell 8% in after-hours trading.

"We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook is for rates to remain unchanged until the second quarter of 2024," Chief Executive Gary Friedman said in a letter to shareholders.

The company raised the low end of its full-year sales outlook to $3.04 billion to $3.1 billion, compared with a prior forecast for $3 billion to $3.1 billion and FactSet expectations for $3.08 billion. RH kept its outlook for adjusted operating margin at a range of 14.5% to 15.5%.

The company forecast third-quarter sales of $740 million to $760 million, below FactSet estimates for $779 million. But for the fourth quarter, the company said it expected $760 million to $800 million in sales, with the midpoint a bit above FactSet forecasts for $775 million.

The company reported second-quarter net income of $76 million, or $3.36 a share, compared with $122 million, or $4.54 a share, in the same quarter last year. Revenue fell to $800 million from $992 million in the prior-year quarter.

Adjusted for legal settlements, noncash compensation and other items, RH earned $3.93 a share.

Analysts polled by FactSet had expected RH to report adjusted earnings per share of $2.65 on revenue of $791 million.

The chain reported the results amid a recovery in the stock market -- to which RH's wealthier customers are more exposed -- but signs of weaker trends in furniture spending.

In May, RH also said it expected the luxury housing market to "remain challenging" into next year thanks to higher mortgage rates, and the company said it expected higher markdowns to clear discontinued products. At that time, the company raised its full-year sales outlook but cut its forecast for adjusted operating margin.

Wedbush analysts, in a note last month, said rivals like Williams-Sonoma Inc. (WSM) recently "saw a deceleration in big-ticket furniture spending." Furniture maker and retailer Ethan Allen Interiors Inc. (ETD) also saw a hit to furniture demand, they said, as consumers spent more of their money on vacations.

They said demand within the luxury housing market was stronger than elsewhere in housing and raised their price target to $360 from $230. However, they said they remained cautious on RH's growth prospects.

"While the company likely set the bar too low and should see upside this quarter, we stay sidelined without more concrete results proving it can successfully stem market share losses while growing its presence in the luxury marketplace," the analysts said.

-Bill Peters

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09-07-23 1653ET

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