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Financial, Retail

RH Reports Third Quarter Fiscal 2024 Results

RH reports third quarter demand increased 13% despite tough housing market, revises Q4 estimates up; announces 2025 introduction of RH Couture Upholstery, a significant new brand extension in the fall of 2024, 7 domestic store openings and minimal impact if tariffs on Chinese goods take effect.

12/12/2024
CORTE MADERA, Calif. -- RH (NYSE: RH) has released its financial results for the third quarter ended November 2, 2024, in a shareholder letter from Chairman and Chief Executive Officer Gary Friedman.

Below is an excerpt from Friedman's letter:
 
The positive inflection of our business continued to gain momentum with third quarter demand increasing 13% despite operating in the worst housing market in 30 years.

Our vector is increasing in both magnitude and direction with November demand up 18%, as the most prolific product transformation and platform expansion in the history of our industry continues to unfold.

Our industry leading growth is being driven by the RH brand where November demand increased 24% with the introduction of our new RH Modern Sourcebook and has continued to accelerate into December with month to date demand up 30%, demonstrating the disruptive nature of our product transformation.

The performance of the RH brand reflects market share gains of 15 to 25 points in Q3, accelerating to 25 to 45 points in Q4 based on our current trends and the expectations of furniture based retailers. We believe our collections reflect a level of design and quality inaccessible in our current market and a value proposition that is disruptive across multiple markets, positioning RH to gain significant market share for the foreseeable future.

Our Contract, Outlet, Baby & Child, and Teen businesses should benefit from our product transformation in 2025 as 1) The new assortment becomes more widely available to support our Contract Business, 2) Returns of the new product drive our Outlet Business, and 3) The most successful designs are translated into smaller sizes for Baby, Child, and Teen.

We are also pleased that results for the third quarter reflected our guidance with revenues increasing 8.1%, adjusted operating margin of 15.0% versus 7.3% last year, and adjusted EBITDA margin of 20.8% versus 12.4% a year ago.

Based on current trends we are raising our fourth quarter and full year guidance to:

• Q4 Total Demand growth of 20% to 22%, and Revenue growth of 18% to 20%
• Q4 Adjusted Operating Margin of 12.2% to 13.2%, and Adjusted EBITDA Margin of 18.0% to 19.0%
• FY Total Demand growth of 9.9% to 10.4%, and Revenue growth of 6.8% to 7.2%
• FY Adjusted Operating Margin of 11.5% to 11.7%, and Adjusted EBITDA Margin of 17.2% to 17.4%

Product Transformation Plan for the Remainder of 2024 and Select 2025 Highlights

The second mailing of our new RH Modern Sourcebook arrived in homes in November with 54 new collections across furniture, upholstery, lighting, rugs and textiles. Based on our demand trends and confidence in the new offering, we increased our advertising investment by approximately $6 million in the quarter to further expand both page count and circulation. The quarter-to-date demand leads us to believe that this investment will prove to be a wise decision over the course of the fourth quarter and into the first half of 2025.

As a reminder, post analysis of our circulation data we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern sourcebooks to optimize overall mailing depth and efficiency. Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry, and is aligned with our Gallery strategy of fewer, more immersive and brand defining physical experiences.

The introduction of our new RH Interiors Sourcebook is now planned to be in homes beginning early February with 89 new collections across furniture, upholstery, lighting, rugs and textiles. The new collections and improved in-stocks, should further increase our vector and market share gains in the first half of 2025.

The introduction of our 2025 RH Outdoor Sourcebook, featuring the most dominant assortment of high quality outdoor furniture in the world is also planned for early February. The new Sourcebook will include eight new outdoor furniture collections, an exciting new outdoor textiles offering, plus a significantly improved in-stock position to start the season versus a year ago.

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 to further elevate the brand and build a highly profitable business model that can scale.

Waterworks, like most other luxury brands in the home space, generates the vast majority of its revenues from the trade market, selling to architects, designers, developers and builders. While RH has a meaningful trade business, the vast majority of our revenue is 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 have expanded other trade focused businesses and brands over the years.

This week we will begin to introduce the Waterworks brand across the RH platform beginning with a 3,000 square foot Waterworks Showroom in our largest new Design Gallery opening tomorrow in Newport Beach, California. Our interior designers around the world will now be able to specify Waterworks in their design projects and customers will be able to view and purchase Waterworks on RH.com in the next few weeks. We also plan to test a Waterworks Sourcebook in the second half of 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.

We also have plans to unveil RH Couture Upholstery by Dmitriy & Co. in the first half of 2025. We purchased Dmitriy & Co. in 2020 with a vision of making the most exquisitely designed and crafted upholstered furniture in the world, previously only available to-the-trade, accessible to consumers on the RH platform. While there has been much speculation regarding how we might change Dmitriy & Co. to address a larger market, our plan is just the opposite. We believe, by not changing anything, we will change everything. Like Waterworks, we believe transitioning some of the most admired brands in the world from a solely trade based to a blended consumer and trade-based business model is a very big idea, and one that can result in exponential growth for these highly desired brands.

Additionally, we plan to introduce a significant new brand extension in the Fall of 2025 that we believe will meaningfully expand the market size and share of the RH brand. This new brand extension will include a new sourcebook and have a significant website presence on RH.com. We expect to present the product in our Galleries in early 2026 and will share more details of this exciting new venture in the new year.

Lastly, we do not expect a negative impact to margins as a result of the most recent communications regarding the potential for increased tariffs in 2025. We have been proactively moving sourcing away from China over the past several years with the expectation of fully exiting the country by the end of the second quarter. We are also transitioning products manufactured in Mexico and believe we can successfully reposition our sourcing with no disruption to the supply chain.

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