RH Earnings: Luxury Home Spending Pause and Transitory Costs Crush Near-Term Profitability

We plan to lower our $327 fair value estimate for no-moat RH by a mid-single-digit rate to account for significant near-term profit pressures, but still view the current market price as an attractive entry point. Although fiscal first-quarter results surpassed our expectations—with sales of $739 million and an adjusted operating margin of 14.9% edging our $728 million and 14% forecasts, respectively—they were a material step down from results during the pandemic era. More specifically, its sales fell 23% and operating margin compressed 980 basis points year over year (hurt both by discounting on the gross margin line and cost deleverage on the operating expense line). Even so, RH’s first-quarter sales were still 23% higher and its operating margin was more than 300 basis points wider than in 2019’s first quarter, displaying the structurally higher earnings power of the business as it has evolved.