CORTE MADERA, Calif. -- RH (NYSE: RH) has released its financial results for the first quarter ended May 4, 2024, in a shareholder letter from Chairman and Chief Executive Officer Gary Friedman.
Below is the shareholder letter:
We are pleased to report that our demand trends inflected positive in the first quarter and continue to build momentum despite operating in the most challenging housing market in three decades. We believe our investments in the most prolific product transformation and platform expansion in our history has positioned RH to gain significant market share in North America while building the foundation for our long-term global expansion across the United Kingdom, Europe, Australia and the Middle East over the next several years.
Our results for the first quarter largely reflected expectations with revenues of $727 million, adjusted operating margin of 6.5%, and adjusted EBITDA margin of 12.3%. Demand was up 3% in the quarter, slightly below our guidance as growth softened when interest rates once again exceeded 7% post the hawkish Fed commentary throughout April.
While aggressively investing during a downturn has put pressure on short-term results, it also positions us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. Those opportunities are beginning to materialize as a growing number of online furniture brands have ceased operations as the vast majority have demonstrated difficulty reaching profitability.
We do expect the constantly changing outlook regarding monetary policy will continue to weigh on the housing market through the second half of 2024 and possibly into 2025.
Nonetheless, we remain confident that our continued investments towards transforming our product and expanding our platform will generate significant long-term value for our shareholders.
EVERY ACT OF CREATION IS FIRST AN ACT OF DESTRUCTION- Pablo Picasso
We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry.
Our Product Transformation Plans for 2024 Include:
The launch of our new RH Outdoor Sourcebook, the most dominant collection of luxury outdoor furniture in the market, arrived in homes in the first quarter with 14 new collections. Outdoor trends continue to remain strong, and we expect to gain significant market share in fiscal 2024.
The unveiling of our new RH Modern Sourcebook arrived in homes throughout early June with 30 new collections across living, dining, bedroom and bathroom. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of fiscal 2024.
The second mailing of our new RH Interiors Sourcebook is now planned to be in home starting in early July with new collections and improved in-stocks, which should also provide an additional lift to demand in the third quarter and continue to build through the remainder of the year.
We will be mailing an updated RH Contemporary Sourcebook in early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends.
A second mailing of the RH Modern Sourcebook and third mailing of our RH Interiors Sourcebook are expected in the second half of 2024 with additional new collections, refreshed Galleries and improved in-stocks.
These mailings will result in a doubling of our Sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business.
As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale.
Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers and builders. While RH has a meaningful trade business, the vast majority of our revenues are generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we’ve expanded other trade focused businesses and brands over the years.
Our plan is to launch with a 3,500 square foot Waterworks Showroom in our largest new Design Gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million dollar business with mid-to-high teens EBITDA margin that we believe has the potential to become a billion-dollar global brand on our platform.
Let me shift your attention to the expansion of our platform. Our plan to expand the RH brand globally, address new markets locally, and transform our North American Galleries represents a multi-billion-dollar opportunity.
Our Platform Expansion Plans for 2024 Include:
The opening of five North American Design Galleries including Cleveland and Palo Alto, which are now open, plus Raleigh, Newport Beach and Montecito, all with integrated RH Interior Design Offices, restaurants and wine bars.
The opening of two international Galleries, in Brussels, which opened in the first quarter, and in Madrid, where we hosted a well-attended opening event last night. Both Galleries are located in beautiful historic buildings that elevate our product and render our brand more valuable.
The opening of our first RH Interior Design Studio in Palm Desert, California. We believe there is an opportunity to address new markets locally by opening Design Studios in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation, as we’ve done in East Hampton and the Napa Valley, as well as augmenting some of our Design Galleries in larger markets with additional design services in stand-alone Design Studios.
OUTLOOK
While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout fiscal 2024.
As previously communicated, due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately 4 to 8 points until we read and react to the new collections, reduce backorders and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business.
We believe it’s also important to note that we are forecasting to end the year with an increased backlog of approximately $110 to $130 million due to revenue lagging demand throughout fiscal 2024, which will negatively impact operating margin and adjusted EBITDA margin by approximately 140 basis points. Additionally, investments and startup costs to support our international expansion are estimated to be an approximate 200 basis point drag for fiscal 2024.
We continue to expect demand growth in the range of 12% to 14% and revenue growth of 8% to 10% on a 52- versus 52- week basis. We are forecasting adjusted operating margin to be in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%.
For the second quarter of fiscal 2024 we are forecasting demand growth in the range of 9% to 10% and revenue growth of 3% to 4%. We are forecasting adjusted operating margin to be in the range of 11% to 12% and adjusted EBITDA margin of 17% to 18%.
Note: The 53rd week of fiscal 2023 contributed approximately $50 million in revenues.
RH BUSINESS VISION & ECOSYSTEM − THE LONG VIEW
We believe, “There are those with taste and no scale, and those with scale and no taste,” and the idea of scaling taste is large and far reaching.
Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world.
Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.
Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade.
Our plan to open immersive Design Galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America, and $20 to $25 billion globally.
Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker.
Our products are elevated and rendered more valuable by our architecturally inspiring Galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.
Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 and RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.
This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our Galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries.
Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences − fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning time-starved consumers.
The entirety of our strategy comes to life digitally with The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.
Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A one percent share of the global market represents a $70 to $100 billion opportunity.
Our ecosystem of Products, Places, Services and Spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.
Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and, by doing so, elevating and rendering our way of life more valuable.
NEVER UNDERESTIMATE THE POWER OF A FEW GOOD PEOPLE WHO DON’T KNOW WHAT CAN’T BE DONE
For the past 23 years we’ve heard others tell us what can’t be done, and for the past 23 years we’ve failed... to listen.
We avoided bankruptcy while being accused of lunacy. While others have been shrinking and closing stores, we’ve been building the largest and most inspiring spaces in the world. When Wall Street didn’t think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we were in the Center of Innovation working on rebuilding our new home, and it’s almost ready for primetime.
From the largest product transformation in our history, to the most inspiring retail experiences in the world. From couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels (Guesthouses). From Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney.
Soon the world will be within our reach.
Never underestimate the power of a few good people who don’t know what can’t be done. Especially these people.
Onward Team RH.