RH Earnings: Luxury Housing Spending Under Pressure, but Intact Fundamentals Support Profit Upside

No-moat RH’s top line continues to struggle due to a sour housing environment that has been hindered by high mortgage rates and limited turnover, resulting in a furniture and home furnishing industry average sales decline of 7.2% in its last quarter. Luxury housing-related spending wasn’t spared, as evidenced by RH’s second-quarter sales decline of 19% (to $800 million), which modestly edged our negative 22% forecast. However, an adjusted operating margin of 20.2% significantly exceeded our 14.5% outlook, helped by $40 million of marketing spending that was reallocated to the third quarter. As such, RH is poised for a midteen sales decline and an operating margin of 8%-10% in the current quarter, a massive compression (roughly 1,200 basis points) that likely accounts for shares tumbling 8% in postmarket trading. Fortunately, the third quarter appears to be the trough in sales and profit pressure, as the implied fourth-quarter guidance includes flat sales (down 8%, excluding the 53rd week) and a 15.5% operating margin at the midpoint. With the 2023 outlook largely unchanged, we don’t plan any material change to our $312 fair value estimate and view shares as modestly overvalued.