RH Earnings: Luxury Home Spending Pause and Transitory Costs Crush Near-Term Profitability

We plan to lower our $327 fair value estimate for no-moat RH 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.

Despite RH’s overall improvement over the past four years, we believe investors are more concerned about a compressed profit outlook for the fiscal year, with the firm calling for an operating margin of 14.5%-15.5%, down from 15%-17% prior, due to inventory clearance over the next few quarters amid softening luxury demand. In our opinion, this softer outlook sent the shares down around 3% after market hours. However, 150 basis points of profit pressure stems from global market growth (investing in brand awareness), with the firm set to open physical locations in the U.K., Brussels, Spain, and Germany through 2024. While such startup costs are likely to prove transitory over the long term, we think they could persist until the initial global rollout is complete, holding RH’s operating margins below 20% until 2026.