RH’s Firm Pricing Strategy Helps Defend Margin During Economic Duress; Long-Term Opportunities Exist

No-moat RH printed third-quarter results that were better than we expected, despite uncertainty surrounding the macroeconomic environment. Sales of $869 million and adjusted EPS of $5.67 outpaced our $865 million and $5.10 respective projections. Although sales fell 14%, they were 28% above the same period in 2019, exhibiting the success RH has had in expanding its total addressable market via both gallery design and hospitality, as well as other new brand building concepts (Guesthouse, for one). While adjusted gross margin contracted 50 basis points, to 49.7%, we favor occupancy cost deleverage over merchandise margin pressure (discounting), as firm pricing signals brand status to consumers. The adjusted operating margin of 20.8% was nearly 700 basis points lower than last year, with 200 basis points of pressure from product launch initiatives, but it was 180 basis points above our forecast. Positive sentiment around third-quarter performance was tempered by a cautious fourth-quarter outlook that implied low-double-digit sales declines and more than 800 basis points in operating margin contraction, indicating RH has not yet escaped hesitant consumer spending patterns. Given this offset, we don’t expect any material change to our $383 fair value estimate and view shares as attractive, trading at a 30% discount.