RH Earnings: Sales Set to Lag Demand as Firm Rolls Out Multiple Sourcebooks Causing Profit Pressure

Shares of no-moat RH tumbled more than 10% in June 13 postmarket trading on weaker-than-anticipated first-quarter profits and a second-quarter outlook calling for operating margin pressure. While first-quarter sales of $727 million were in line with our forecast, the adjusted operating margin of 6.5% was about 50 basis points below our estimate and 840 basis points below last year. However, the second-quarter outlook was more disappointing, including sales growth of 3%-4%, well below our 10% projection, and an operating margin of 11%-12%. Like the first-quarter result, the latter is more than 800 basis points lower than in the same period in 2023. Unfortunately, with just one sourcebook mailed during the first quarter, the benefit of robust new collections across the remaining books to be sent is unlikely to have a material sales or profit benefit until the second half of 2024. Adding near-term pressure is a US housing market that continues to face friction as mortgage rates are currently below 7%. We believe investors remain concerned that a weak housing market could persist into next year, hindering progress on profit at RH.