Q2 2025 Earnings Summary
- RH's margins have turned positive, and the company is experiencing a strong positive demand trend, fueled by its prolific product transformation and platform expansion, including significant new gallery openings like RH Newport Beach, expected to be a dominant and disruptive force in Southern California.
- RH's international expansion into key markets such as Paris, London, and Milan is poised to significantly boost global brand awareness and drive growth in the European market, with flagship galleries in these cities expected to be transformative for the company's international presence.
- RH's continuous innovation and data-driven strategy, along with extensive new product introductions, position the company to gain significant market share and outperform competitors over the coming quarters and years.
- Inventory levels increased more than 20 percentage points faster than sales, suggesting potential overstocking and challenges in inventory management, which could pressure margins.
- International investments are posing a larger headwind than previously planned, as the company notes that international investment headwinds ticked up due to lower sales, indicating potential delays and increased costs in international expansion impacting profitability.
- The company is still in the midst of promotional activities and winding down old discontinued products, implying ongoing margin pressures and execution risks during the transition to new collections.
-
Confidence in Demand Trends
Q: How durable is the recent demand increase?
A: Gary Friedman expressed strong confidence in the company's outlook and demand trends, stating they've learned a lot and gathered significant data supporting their positive view, despite potential interest rate fluctuations. -
Product Margins and Profitability
Q: How are product margins expected to perform?
A: Gary Friedman indicated that product margins have reflected positively in the third quarter and the company feels very good about the business, liking where they are with demand vectors unveiling themselves and margins inflecting positive. -
Resetting Store Assortments
Q: What's the progress on resetting store assortments?
A: The company is in the early stages, with approximately 35% to 40% of galleries updated. Gary Friedman emphasized the importance of getting the right goods into galleries to significantly lift the business. -
Product Assortment and Newness Cadence
Q: Are you at the targeted level of product newness?
A: Gary Friedman stated they have a lot of newness coming in the second half and throughout next year. They expect to hit 85% new assortment in the first half of next year, reaching a more predictable cadence by mid to late next year. -
Gallery Openings and Expansion Plans
Q: Can you maintain the pace of gallery openings?
A: The company plans to open 8 locations this year, including 7 galleries and 1 studio. Gary Friedman mentioned the pipeline is big, and over the next 4-5 years, they expect to open more galleries than in the last 5 years, though exact numbers may vary annually. -
International Expansion
Q: How is the international business trajectory?
A: Gary Friedman is optimistic, noting that significant impact will come with the opening of major galleries in Paris next spring, London late next year, and Milan thereafter. He believes these openings will greatly enhance brand awareness and business in Europe. -
Inventory Levels
Q: Why is inventory growing faster than sales?
A: The higher inventory levels are part of an "insurance policy" to facilitate the transition to new assortments without stockouts. The company is learning through this process and expects to optimize inventory levels over time. -
Housing Market Impact
Q: How will luxury housing react to rate cuts?
A: Gary Friedman believes it's about closing the affordability gap. There's pent-up demand, but the reaction depends on how much rate cuts improve affordability. He expresses preference for the Fed to ensure inflation is controlled before cutting rates. -
Promotions and Discontinued Products
Q: Where do you stand on clearing old products?
A: The company is in the midst of transitioning, learning, and building a bridge to future assortments. Gary Friedman suggests not focusing excessively on markdowns but on demand vectors and margin inflection, implying the promotions are part of a strategic move. -
Contract Business Growth
Q: How significant is the contract business becoming?
A: While not providing specific figures, Gary Friedman indicated that as the core RH brand strengthens, the contract business will also grow stronger. He emphasized that all ancillary businesses benefit from the strength of the core brand.