RH (NYSE:RH) Surprises With Q2 Sales But Stock Drops

Luxury furniture retailer RH (NYSE:RH) announced better-than-expected results in Q2 FY2023, with revenue down 19.3% year on year to $800.5 million. However, next quarter's revenue guidance of $750 million was less impressive, coming in 3.17% below analysts' estimates. Turning to EPS, RH made a non-GAAP profit of $3.93 per share, down from its profit of $8.08 per share in the same quarter last year.

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RH (RH) Q2 FY2023 Highlights:

• Revenue: $800.5 million vs analyst estimates of $786 million (1.84% beat)
• EPS (non-GAAP): $3.93 vs analyst estimates of $2.60 (51% beat)
• Revenue Guidance for Q3 2023 is $750 million at the midpoint, below analyst estimates of $774.5 million
• The company reconfirmed its revenue guidance for the full year of $3.07 billion at the midpoint
• Free Cash Flow of $114.2 million, up from $23.4 million in the same quarter last year
• Gross Margin (GAAP): 47.5%, down from 52.8% in the same quarter last year
• Store Locations: 82 at quarter end, increasing by 1 over the last 12 months

Formerly known as Restoration Hardware, RH (NYSE:RH) is a specialty retailer that exclusively sells its own brand of of high-end furniture and home decor.

Furniture retailers understand that ‘home is where the heart is’ but that no home is complete without that comfy sofa to kick back on or a dreamy bed to rest in. These stores focus on providing not only what is practically needed in a house but also aesthetics, style, and charm in the form of tables, lamps, and mirrors. Decades ago, it was thought that furniture would resist e-commerce because of the logistical challenges of shipping large furniture, but now you can buy a mattress online and get it in a box a few days later; so just like other retailers, furniture stores need to adapt to new realities and consumer behaviors.

Sales GrowthRH is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's annualized revenue growth rate of 5.05% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre despite closing stores.

This quarter, RH's revenue fell 19.3% year on year to $800.5 million but beat Wall Street's estimates by 1.84%. The company is guiding for a 13.7% year-on-year revenue decline next quarter to $750 million, a further deceleration from the 13.6% year-on-year decrease it recorded in the same quarter last year. Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

Number of Stores

When a retailer like RH keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. RH's store count increased by 1 locations, or 1.23%, over the last 12 months to 82 total retail locations in the most recently reported quarter.

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Key Takeaways from RH's Q2 Results With a market capitalization of $6.87 billion, RH is among smaller companies, but its $420.6 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly RH blew past analysts' EPS expectations this quarter. That really stood out as a positive in these results. However, the company's management team noted that it expects the luxury housing market and the broader economy to remain challenging throughout the rest of the year and into next year as mortgage rates stay near 20-year highs. Overall, this was a mixed quarter for RH and the commentary likely spooked investors. The company is down 8.11% on the results and currently trades at $339 per share.

The author has no position in any of the stocks mentioned in this report.