RH (RH)

Luxury furniture retailer RH (NYSE:RH) fell short of the market’s revenue expectations in Q4 CY2024, but sales rose 10% year on year to $812.4 million. Next quarter’s revenue guidance of $810.6 million underwhelmed, coming in 2.8% below analysts’ estimates. Its non-GAAP profit of $1.58 per share was 17.2% below analysts’ consensus estimates.

Company Overview

Formerly known as Restoration Hardware, RH (NYSE:RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.

Furniture retailers understand that ‘home is where the heart is’ but that no home is complete without that comfy sofa to kick back on or a dreamy bed to rest in. These stores focus on providing not only what is practically needed in a house but also aesthetics, style, and charm in the form of tables, lamps, and mirrors. Decades ago, it was thought that furniture would resist e-commerce because of the logistical challenges of shipping large furniture, but now you can buy a mattress online and get it in a box a few days later; so just like other retailers, furniture stores need to adapt to new realities and consumer behaviors.

Competitors offering higher-end furniture include public companies Arhaus (NASDAQ:ARHS), MillerKnoll (NASDAQ:MLKN), and Design Capital Ltd. (SEHK:1545). Private company West Elm is also a competitor.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $3.18 billion in revenue over the past 12 months, RH is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, RH’s 3.7% annualized revenue growth over the last five years (we compare to 2019 to normalize for COVID-19 impacts) was sluggish.

This quarter, RH’s revenue grew by 10% year on year to $812.4 million but fell short of Wall Street’s estimates. Company management is currently guiding for a 11.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.5% over the next 12 months, an acceleration versus the last five years. This projection is eye-popping and implies its newer products will spur better top-line performance.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Over the last two years, RH opened new stores quickly, averaging 2.6% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Note that RH reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

RH’s demand has been shrinking over the last two years as its same-store sales have averaged 7.7% annual declines. This performance is concerning - it shows RH artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

Note that RH reports its same-store sales intermittently, so some data points are missing in the chart below.

RH has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 45.2% gross margin over the last two years. That means for every $100 in revenue, only $54.85 went towards paying for inventory, transportation, and distribution.

In Q4, RH produced a 44.7% gross profit margin, up 1.2 percentage points year on year and exceeding analysts’ estimates by 0.7%. Zooming out, however, RH’s full-year margin has been trending down over the past 12 months, decreasing by 1.4 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to discount products and higher input costs (such as labor and freight expenses to transport goods).

RH has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer retail business, producing an average operating margin of 11.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, RH’s operating margin decreased by 1.9 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q4, RH generated an operating profit margin of 8.7%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for RH, its EPS declined by 14.5% annually over the last five years while its revenue grew by 3.7%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

In Q4, RH reported EPS at $1.58, up from $0.72 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects RH’s full-year EPS of $5.35 to grow 135%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, RH’s capital-intensive business model and investments in new physical locations have consumed many resources. Its free cash flow margin averaged negative 4.5%, meaning it lit $4.52 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments in working capital/capital expenditures are the primary culprit.

Taking a step back, we can see that RH’s margin dropped by 4.5 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

RH burned through $69.67 million of cash in Q4, equivalent to a negative 8.6% margin. The company’s cash burn slowed from $251.5 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although RH hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 34%, splendid for a consumer retail business.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

RH burned through $213.7 million of cash over the last year, and its $3.79 billion of debt exceeds the $30.41 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the RH’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of RH until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We struggled to find many positives this quarter as RH missed across all key metrics. Its revenue guidance for next quarter also fell short. Overall, this quarter could have been better. The stock traded down 26% to $184.99 immediately after reporting.

Updated: May 22, 2025 at 10:27 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

RH isn’t a terrible business, but it doesn’t pass our bar. To begin with, its revenue growth was uninspiring over the last five years. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its shrinking same-store sales tell us it will need to change its strategy to succeed. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

RH’s P/E ratio based on the next 12 months is 14.9x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $260.12 on the company (compared to the current share price of $187.43).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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