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Restoration Hardware: Evidence that Home Furnishing Headwinds are Widespread

RJ Hottovy
Jul 1, 2022
Restoration Hardware: Evidence that Home Furnishing Headwinds are Widespread

Last week, we discussed Arhaus and how it was delivering positive YoY visitation trends at a time when most home furnishing chains were seeing declines. We noted that a more affluent customer base certainly contributed to these trends, along with new customer acquisition techniques, a redesigned theater-like retail showroom format, and early contribution from smaller format design studio locations. That said, there are indications that these trends are not playing out across the premium home furnishing category, as Restoration Hardware (RH) Chairman and CEO Gary Friedman painted a more cautionary outlook for the company: “The deteriorating macro-economic environment has resulted in lower-than-expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year.” Accordingly, the company made the following adjustments to its full-year outlook:

  • Fiscal 2022 net revenue growth in the range of -2% to -5%, with an adjusted operating margin in the range of 21.0%-22.0%. This compares to a previous outlook forecasting full-year net revenue growth in the range of 0% to 2% with an adjusted operating margin in the range of 23.0%-24.0% (compared to 25.6% a year ago) in the company’s 1Q22 update on June 2.
  • 2Q22 net revenue growth in the range of -1% to -3%, with an adjusted operating margin in the range of 23.0% to 23.5%. RH’s 2Q22 outlook remains unchanged from our prior forecast due to faster backlog relief offsetting lower-than-expected demand.

Friedman continued, “With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year. While we anticipate the next several quarters will pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality, and choose not to promote our business while we navigate through the multiple macro headwinds, we continue to believe our long-term investments will enable us to drive industry-leading performance over a longer-term horizon."

  • What does data say about RH and home furnishing trends? Placer data backs Freidman’s comments about a lower-than-expected demand. While visitation trends had turned negative for the chain in February as we lapped government stimulus payments and other tailwinds, it had remained ahead of overall YoY home furnishing category visitation trends from March through early June. Nevertheless, we’ve seen visitation trends downturn in the past several weeks, explaining the updated outlook and indicating that demand for home furnishing products may be waning across the entire category, not just more value-conscious consumers.
  • Why is Arhaus outperforming? This brings us back to Arhaus, which our analysis shows to have bucked the trend facing much of the home furnishing category as it continues to drive positive YoY visitation growth. In our view, it comes down to several factors, including site selection (many of Arhaus’ new openings have come in markets benefitting from recent migration patterns, which we discussed in a recent whitepaper) and strategic marketing efforts. While YoY visitation trends may turn negative for Arhaus if the macro pressures on Bed Bath & Beyond and RH persist, we expect the retailer to stay ahead of its competition, especially as its Design Studio format becomes a more important contributor.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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