RH Reports Third Quarter 2024 Results

December 12, 2024  by Karen Parrish in Business Strategy, Industry   

THIRD QUARTER 2024 HIGHLIGHTS

— GAAP Net Revenues of $812M, up 8.1%, GAAP Operating Margin of 12.5%, Adjusted Operating Margin of 15.0%
— GAAP Net Income of $33M, Adjusted Net Income of $49M, Adjusted EBITDA Margin of 20.8%

— Q3 Total Demand Growth increased 13%, RH Brand Demand Growth increased 14%
— Nov Total Demand Growth accelerated to up 18%, RH Brand Demand Growth accelerated to up 24%

IN THE LETTER FROM THE CEO & CHAIRMAN, GARY FRIEDMAN:

TO OUR PEOPLE, PARTNERS AND SHAREHOLDERS,

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%

Note: The above outlook for Demand and Revenue growth is provided on a 52 versus 52 week basis. The 53rd week of fiscal 2023 contributed approximately $50 million in revenues. Additionally, the 53rd week benefited adjusted operating margin in Q4 2023 by 50 basis points.

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

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 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...

... 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.

Let me shift your attention to the elevation and expansion of our platform.

We continue to open the most inspiring and immersive physical experiences in our industry, and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry and perfect proportions... Spaces that activate all of the senses, and spaces that cannot be replicated online.

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 Remainder of 2024 and 2025 Includes:

RH Newport Beach, opening 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 experiences to date, and will replace three legacy Galleries in the region. RH Newport Beach, The Gallery at Fashion Island features the RH Ocean Grill, a 270 seat Indoor-Outdoor Rooftop Restaurant with uninterrupted views and dramatic sunsets over the California coastline, two Wine & Barista Bars, our first Waterworks Showroom, an Interior Design Atelier, and the most expansive Luxury Outdoor Furniture assortment in our industry. We believe 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 Montecito is a reimagination of the Historic Fire House in the charming enclave perched above Santa Barbara. The Gallery will feature The RH Firehouse Grill, an indoor-outdoor Courtyard Restaurant with fireplaces and fountains, a Wine & Barista Bar, plus an Interior Design Atelier.

The first RH Interior Design Studio is opening this week in Palm Desert, California. Our goal is to establish RH as the leading interior design firm in the world, as we’ve moved the brand from simply curating and selling product to conceptualizing and selling spaces. The Palm Desert location is a unique test of a consumer facing interior design firm, not a Gallery. Our theory is, by presenting RH Interior Design in a singular fashion, as a professional interior design firm, we will attract the highest caliber interior designers, and therefore the highest value consumers. We believe this might be one of the most important strategies to elevate and distinguish the RH brand as a global design authority at the highest end of the market.

We are also developing an RH Design Ecosystem in Palm Desert with plans to add a 10,000 square foot RH Design Gallery and a freestanding 5,000 square foot RH Outdoor Furniture Gallery on the same street. Additionally, we are considering a freestanding RH All Day Cafe to complete the ecosystem in the near future.

RH Raleigh opened in November of this year with 50,000 square feet of indoor and outdoor space over three levels, The Gallery includes a Rooftop Restaurant, Garden Courtyards, a Wine & Barista Bar, and an Interior Design Atelier.

We plan to open seven North American Galleries in 2025 including Montreal, Manhasset, Detroit, Oklahoma City, Los Gatos, Palm Desert and Aspen.

Additionally, we plan to open two International Galleries in 2025, RH Paris and RH London.

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 gain scale to support the advertising investments necessary to build our business across Europe.

We are also making meaningful investments to elevate and differentiate our online experience with plans to upgrade our website in the fourth quarter of 2024 and throughout 2025. 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.

To view the entire letter and financial reports, visit the investor website.