RH Profitability Crushed by Tumbling High-End Housing, but Margins Remain Best in Class

We plan to lower our $375 per share fair value estimate for no-moat RH by around 15%, with the expected contraction in 2023 sales and operating profit accounting for most of the change. RH offered a full-year outlook including sales of $2.9 billion-$3.1 billion, implying a midteen downtick, and an operating margin of 15%-17%, representing a roughly 600-basis point contraction. This outlook is significantly below our 3% sales growth and above-20% operating margin forecast for 2023, which we now plan to adjust closer to the expected ranges. Given rising interest rates over the past year and dire existing home sales of units over $1 million (which have averaged 38% declines over the last three months, according to National Association of Realtors), correlated spending on home furnishings is slowing. That said, we don’t think demand has permanently evaporated or been reallocated to lower-price offerings; rather, we think such spending has been postponed until equity markets (where significant household wealth is held) and interest rates (for mortgage costs) stabilize.