Behind The Numbers – Restoration Hardware (RH)
After the close yesterday, Restoration Hardware (RH) posted a beat on both the top and bottom line. More specifically, EPS came in at $7.03 vs $6.63 estimate while Revenue came in at $1.01B vs $983.86M estimate. The company said net revenue increased 19% Y/Y and 49% from 2019. UBS analyst Michael Lasser would say that now, the big question is will underlying demand remain steady as the economy normalizes. In Q3, they believe meaningful price increases supported its top-line, so unit increases were likely very modest. Importantly, its operating margin expanded 100 bps to 27.7% vs 26.5% estimate, driven entirely by 180 bps of gross margin gains. From here, the bull case is that RH has visible sales drivers into 2022 and beyond (more on this below). Plus, it can continue to grow its margins as it raises prices and manages its cost structure. Still, over the next couple of quarters, RH’s core demand could face some headwinds as affluent customers get back to spending on travel and entertainment.
Wedbush analyst Seth Basham, in his post-earnings note, commented that for the first time this year with quarterly results, the company did not raise the high end of its 2021 guidance for sales growth or operating margins, implying a pronounced slowdown in Q4. The company overcame rising supply chain pressures in the most recent quarter but is leaving room in Q4 for added supply chain and macro uncertainty particularly given a 6% sequential decline in inventory on hand. Furthermore, the analyst adds that the company’s implied Q4 sequential slowdown in operating margin expansion vs. 2019 primarily reflects lower sales expectations vs. Q3.
Onto the conference call where CEO Gary Friedman could not be any more bullish. He echoed his statements from the shareholder letter where he admitted that their plans for fiscal 2020 and 2021 were delayed by the virus, but “make no mistake, they were not disrupted by it.” Quite the contrary, he remarked, saying the company wasted no time allowing themselves to be victims of the current reality. They used their time to reimagine and reinvent themselves once again. “We said let this be remembered as the time RH unleashed the greatest display of innovation our industry has ever seen. That’s why we refer to 2022, as The Year Of The New, and it will include”
–RH Contemporary, “the most meaningful new product launch in our history,” inclusive of a 500-plus-page Source Book, a freestanding RH Contemporary Gallery, a dedicated website, and a national advertising campaign.
-Expansion of RH Interiors and RH Modern
-Global expansion with the opening of RH England, The Gallery at the Historic Aynhoe Park, a magical 73-acre estate designed in 1615 “that will introduce RH to the UK in a dramatic and unforgettable fashion.” Additionally, they have secured locations for Galleries in London, Paris, Munich and Dusseldorf, and are in lease or purchase negotiations for Galleries in Milan, Madrid, Brussels and France.
-The opening of their first RH Guesthouse in New York
–The World of RH, a new digital portal presenting their integrated ecosystem of Products, Places, Services and Spaces
-The lift off of RH1 & RH2, their customized Gulfstream G650ER and G550 that will be available for charter
-The christening of RH3, their luxury yacht that will be available for charter in the Mediterranean and Caribbean
-The expansion of RH In-Your-Home, a unique and memorable delivery experience with Furniture Ambassadors guiding every detail of your delivery and extending the selling experience into the home.
BofA, in their post-earnings note, said they remain positive on growth going into 2022, particularly as RH confirmed a slew of big initiatives are still on track despite a continuation of severe supply chain disruptions. “We continue to see Street estimates for 9% sales growth in 2022 as too conservative.” JPMorgan noted that the upcoming brand launches should raise average ticket given RH Couture and Bespoke are expected to be meaningfully higher priced than the existing RH product portfolio. They also added that advertising expenses will pick up in Q1 and more so in Q2 to support the new initiatives, but associated revenues should continue to flow through as many of the orders are likely to be special orders or custom made.
Finally, BofA said they see several reasons to be positive on growth for premium home furnishings given: 1) it is growing above the market as a whole; 2) is fragmented with the top eight premium players only having less than 15% market share and; 3) it is supported by still buoyant high-end home turnover. They also see growth supported by their view that affluent consumers are: 1) more likely to have flexible working arrangements keeping them in the home (or in second homes) and spending more on home goods for the foreseeable future and 2) less price sensitive, an advantage in an inflationary environment. “All these factors bode well for above market growth for RH given its growing brand, increasingly premium product assortment and pricing power.”