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Restoration Hardware (New York Stock Exchange:RH)’s 2023 performance is showing signs of stabilization, and he expressed optimism about the possibility of a business recovery. The launch of the RH Outdoor and Modern Collections has been met with initial positive response, Further product transformation is expected by 2025. Overall, RH’s unique strategy of positioning itself as a leader in luxury furniture design is a double-edged sword: tastes are subjective and difficult to quantify, so investors should closely monitor RH’s products and compare them with competitors to make an informed investment decision. Previous ArticleI have decided to downgrade the rating on the stock to Hold and I believe investors should wait to see the results of the recent product transformation investment before taking any further decisions.
Business Update
For the full fiscal year 2023, RH report Revenues of $3.03 billion reflected the decline. Sales in the fourth quarter of 2023 increased 15.6% year-over-year to $178 million, down from 50.47% in the same period last year. SG&A expenses increased to 33.12% from 30.1% in the same period last year. As a result, operating margins fell from 20% to 13%, a clear decline in 2023 performance. However, there were signs of stabilization in the fourth quarter. Sales in the fourth quarter of 2023 declined 4.43% year-over-year, the smallest decline since the third quarter of 2022. Notably, when considering the $40 million revenue impact from weather in January and vessel delays related to the conflict in the Red Sea, revenue in the fourth quarter of 2023 will increase by $8 million year-over-year to $778 million. This adjustment suggests that RH has gained market share from Williams-Sonoma, whose sales declined 5%, and another peer, whose sales declined 3%.
Product transformation remains a key priority even in a weak market
The post-pandemic macro environment has not been favorable for RH. Rising home prices and rising interest rates and mortgage rates have discouraged some people from investing in second homes or renovating existing homes. Additionally, the recent increase in travel has reduced the high demand for homes seen during the pandemic. Despite these challenges, RH has not scaled back investments in its brand. Rather, it has accelerated these efforts. CEO Gary Friedman said in a recent earnings call:
We’ve invested in the most compelling product transformation and platform expansion in our history, even as we face the toughest housing market in 30 years.
2024 will see a wave of multiple product lines and galleries. This includes the launch of the RH Outdoor Sourcebook, an updated RH Modern Sourcebook, an updated RH Interior Sourcebook, and an updated RH Contemporary Sourcebook. All these new designs will be combined with new collections, refreshed galleries, and improved inventory. In 2024, RH plans to open five galleries in North America. All galleries will have design offices, restaurants, and wine bars. Two international gallery openings will be in Brussels and Madrid. RH Paris will be delayed to 2025 due to the 2024 Olympics. The RH Sydney development has just received approval with plans to open in Fall 2026. Also opening in California is a 3,500 square foot Waterworks showroom focused on bath and kitchen products, aiming to open in Q4 2024. Additionally, collection development continues with the introduction of new collections such as RH Couture, RH Bespoke, RH Colour, RH Antiques & Artifacts and RH Atelier, which are scheduled to be launched over the next decade.
Focus on providing unique designs
RH’s product transformation encompasses galleries, design studios and various hospitality initiatives, establishing a comprehensive ecosystem of luxury spaces. The company has seen success with recent products such as RH Outdoor and RH Modern, which are characterized by unique design and exceptional quality. The presentation of these products is impressive, further cementing RH’s reputation for consistently delivering upscale products. Our focus on the affluent customer allows RH to effectively collect high-quality data, remaining well-informed and ahead of emerging design trends. We believe this strategic approach has kept RH at the forefront of the luxury market, with its products highly differentiated and setting the benchmark for design excellence.
RH is also very good at leveraging its assets to grow its design capabilities. As RH grows and attracts more affluent customers, it will be able to collect data, try new ideas, and predict consumer preferences. It will also attract more designers who want to contract with RH, who often have greater insight into the field. The current RH style is very neutral in color, but rich in details and shapes. This has a timeless appeal and can cater to a wide range of tastes.
The risks of being the “arbitrator of taste”
On the other hand, the significant investment in design and styling may create significant uncertainty for shareholders. RH is ambitiously expanding its business by positioning itself as the “arbiter of taste,” but it may face challenges such as rapidly changing trends, potential confusion regarding its brand identity, and increasing production complexity. The sustainability of the success of a luxury brand based solely on design is questionable. Moreover, furniture designs can be quickly replicated and modified, unintentionally providing competitors with free rein in design development. It is unclear whether RH’s additional costs in design will generate good returns for investors. Investors should therefore closely monitor RH’s new product releases and evaluate whether its design and styling are at the forefront of innovation.
Conclusion
Overall, I believe RH stands out as one of the most innovative and productive companies in the luxury furniture sector. The company’s CEO, Gary Friedman, is a true visionary and holds a 25% stake in the company, demonstrating a strong commitment to its success by 2024. Outlook It forecasts demand growth of 12-14% and revenue growth of 8-10%, signaling that RH is eager to return to growth. These targets are higher than those of competitors such as Williams-Sonoma and Ahaus. If RH meets these expectations, it could signal that its product transformation is effective and that it is poised to gain market share in the future.
However, European expansion will require significant capital expenditures (approximately $270 million). Given that free cash flow remains negative, the current enterprise value of $8 billion seems too high in the short term. However, in the long term, if we believe in the 20% operating margin target set by Gary Friedman and assume 10% revenue growth, RH could achieve significant free cash flow of approximately $800 million within 10 years as macroeconomic conditions improve. Given Gary’s willingness to aggressively buy back shares, it is unlikely that the stock will remain at a low valuation for long if RH’s business outlook improves.
