CORTE MADERA, Calif.--(BUSINESS WIRE)-- RH (NYSE: RH) has released its financial results for the second quarter ended August 3, 2024, in a shareholder letter from Chairman and Chief Executive Officer Gary Friedman, which is below:
We are pleased to report that demand was up 7% in the second quarter and has continued to inflect positive, gaining momentum each month with July finishing up 10%. demand accelerated into the third quarter with August up 12% and product margins inflecting positive despite operating in the most challenging housing market in three decades. Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia and the Middle East over the next decade.
While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry. Vectors are measured in magnitude and direction, and can be effective in forecasting strategic separation and future market share gains. It is now clear that our vector is increasing by both measures as we are outperforming the industry by 15 to 25 points. We expect our performance will continue to gain momentum in the second half of 2024 fueled by our multi-year effort to elevate our product, and a multi-decade effort to elevate and expand our platform.
We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and adjusted EBITDA margin of 17.2%.
While aggressively investing into a downturn has put pressure on short-term results, it has also positioned RH to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. We believe our demand performance demonstrates we are the best positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower, closing the affordability gap that has suppressed the market for the past several years.
SECOND QUARTER 2024 FINANCIAL RESULTS
Our Product Transformation Plan for the Second Half of 2024 Includes:
The second mailing of our new RH Interiors Sourcebook, which arrived in homes mid-July through mid-August, is fueling our industry leading demand. With new collections and improved in-stocks, our demand should continue to build throughout the second half of 2024.
Post analysis of our circulation data we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern books 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 second mailing of the new RH Modern Sourcebook is scheduled for November with additional new collections and an expanded assortment, including the Contemporary book consolidation. Again, we believe our expanded assortment and improved in-stock position will provide an additional lift to our business in the fourth quarter.
The third mailing of the new RH Interiors Sourcebook is planned to be in homes early January through February, capitalizing on what is traditionally one of the largest selling seasons for furniture post consumers and designers returning from holiday travel. This mailing should help generate a strong finish to 2024 and continue the momentum as we enter next year.
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 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.
Our plan is to launch with a 3,000 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.
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 Plan for the Second Half of 2024 Includes:
RH Newport Beach, opening in November with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean, will be one of our most dramatic, immersive and brand defining physical locations to date, and will replace three legacy galleries in the region. With a 260 seat Indoor-Outdoor Rooftop Restaurant with uninterrupted views of the California coastline, two Wine & Barista Bars, an Interior Design Atelier, our first Waterworks Showroom, and the most expansive Luxury Outdoor Furniture assortment in our industry, RH Newport Beach will be an inspiring destination in the Southern California market and has the potential to become our second $100M plus Gallery.
RH Raleigh, also opening in November, features 50,000 square feet of indoor and outdoor space over three levels, with a Rooftop Restaurant, Garden Courtyards, a Wine & Barista Bar, and an Interior Design Atelier.
RH Montecito, opening in early December, is a reimagination of the Historic Fire House in the charming enclave perched above Santa Barbara, California, featuring an indoor-outdoor Courtyard Restaurant with fireplaces and fountains, a Wine & Barista Bar and an Interior Design Atelier.
The opening of our first RH Interior Design Office in Palm Desert, California this November. We believe there is an opportunity to address new markets locally by opening Design Offices in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation. The Palm Desert location is a unique test of a consumer facing professional interior design office, separate from a Gallery. Our goal is to establish the RH brand as the leader in the world of professional interior design, and enable us to attract the highest caliber interior designers in the industry.
As we look forward, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris and London in 2025, and Milan in 2026. It is then we will begin to have the scale to support the advertising investments necessary to build our business across Europe. We are looking forward to discussing our global expansion in further detail once we open those important markets.
We are also making meaningful investments to elevate and differentiate our online experience and will be making meaningful upgrades to our website throughout the second half of 2024. Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market. We plan to file for design patents on several of the user interface and presentation designs and will begin to discuss the new website strategy in more detail as we roll out the new functionality.
OUTLOOK
Despite expectations for industry 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 and into 2025.
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 is also important to note that we are now forecasting to end the year with an increased backlog of approximately $80 to $100 million due to revenue lagging demand throughout 2024, which will negatively impact adjusted operating and EBITDA margins by approximately 100 basis points for the year. Additionally, investments and startup costs to support our international expansion are now estimated to be an approximate 230 basis point drag for 2024.
Due to our inflection ramping later than expected we are adjusting our full year forecast for fiscal 2024 as follows (52- versus 52-week basis):
-- Demand in the range of 8% to 10%
-- Revenue growth in the range of 5% to 7%
-- Adjusted Operating Margin in the range of 11% to 12% Adjusted EBITDA Margin in the range of 17% to 18%
For the third quarter of fiscal 2024 we are forecasting:
Demand growth in the range of 12% to 14%
Revenue growth in the range of 7% to 9%
Adjusted Operating Margin in the range of 15% to 16% Adjusted EBITDA Margin in the range of 21% to 22%
(Note: The above outlook is provided on a 52 versus 52 week basis. The 53rd week of fiscal 2023 contributed approximately $50 million in revenues.)