After a rather wild earnings call three months ago — during which he blamed a “collapsing” luxury housing market for poor quarterly results — RH CEO Gary Friedman is back at it.
“Inflation that was thought to be transitory is now deemed persistent by the Federal Reserve, resulting in a record rise in interest rates, triggering a dramatic decline of the housing market, with luxury home sales down 45% in the most recent quarter versus a year ago,” Friedman said on a late Wednesday earnings call. “Add to that an underperforming stock market, and a banking crisis no one saw coming and the data points to business in our sector are likely to get worse before it gets better.”
The high-end home furnishings player’s chief executive didn’t stop there.
“All one has to do is Google the history of the federal funds rate and zoom in on the 1970s to 1980 and look how many times, the Federal Reserve brought inflation under control, lowered the federal funds rate only to have to raise it twice as high all the way to, I think 21%, but if you look at those moves and zoom into that chart, you realize that we’re in uncharted waters today from an economic environment perspective,” he added later on in the call.
Friedman went on to rail against heightened industry discounting and then once again characterized the housing market as collapsing.
RH’s limp quarter and soft outlook — in part fueled by the decisions of Friedman and his management team amid the current macroeconomic environment — add subtext to the fiery earnings call.
The company’s fourth quarter sales plunged 14.4% year over year to $772.5 million. Operating profits plunged 48% from a year earlier to $112.2 million. Inventory ballooned about $70 million from a year ago as sales hit the skids.
For the first quarter, RH guided to sales from $720 million to $735 million while the Street has estimated $828.3 million. Operating margins are pegged in a range of 13% to 14%, well below analyst forecasts for 18.6%.
Full-year sales are seen in the $2.9 billion to $3.48 billion range. Analysts predicted $3.48 billion.
RH stock (RH) fell 6% in pre-market trading on Thursday.
“With ‘challenging business conditions’ anticipated for at least the next several quarters, we do not see a promising buying opportunity at current trading levels,” Jefferies analyst Jonathan Matuszewski wrote in a client note on RH.
Recent industry research out of Matuszewski indicated why sales of RH products have markedly slowed down.
The findings showed the median price for a luxury home in 15 key markets — specifically homes that sold for more than $2.5 million — was up 6% year-over-year in January, a “steep” deceleration from December’s 20% gain.
In January, the median home price sold in luxury markets was at a 23% discount to listings, wider than November and December. Luxury homes are priced above $2.5 million are at a new multi-year peak in terms of days on the market at 61 versus 37 in January 2022.
Besides much higher interest rates, Jefferies thinks broader economic shifts like growing tech layoffs are also putting pressure on the luxury home market.
“March 2023 data shows investment bank bonuses fell 30-50%,” Matuszewski explained. “Mid-level private equity professionals down ~33%.”
On the earnings call, Friedman added that “I can tell you, the unsettling feeling as being a person on a Saturday afternoon watching Warriors basketball game and the news cut to line formed around your local bank while the bank was sending hourly e-mails trying to tell you that they are committed to serving you. It’s very unsettling feeling, okay? And those of you maybe on the East Coast that didn’t experience what happened here in the West Coast, maybe aren’t as close to it, but I as a person that was close to it, have never seen anything like it.”
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