A new revenue cycle brings another blunt call from candid CEO Gary Friedman, who is looking for furniture.
After basically saying the housing market was crumbling under the weight of higher interest rates in an earnings call in late March, RH’s chief executive said late Thursday that he and his team were overcharging wealthy people for already expensive furniture in the good times .
“I think the world has been raising prices, and we all know that because inflation is at its highest level in 40 years, right? And that’s going to affect things. And I think we’re probably being a little too cavalier in our ability to set prices in an easy-demand environment,” Friedman acknowledged. “And as the easy demand environment has eased and we really need to challenge, will our value equation create the level of demand that we think is right for the business?”
Judging by the latest results from RH, formerly known as Restoration Hardware, consumers don’t see the value in putting a $2,300 wood dining table on a charge card with a much higher interest rate. Especially now that the housing market remains under pressure.
Sales for the California-based furniture retailer fell 23% year-over-year in the first quarter to $739.2 million, it reported Thursday. Gross profit margins fell from 52.1% a year earlier to 47%.
Friedman said RH will now act aggressively to reduce excess inventory this year by offering discounts, which will take a bite out of margins.
Adjusted operating margins for the full year are solid between 14.5% and 15.5%, down from 15% to 17%. Sales for the year were guided to $3 billion to $3.1 billion, up from $2.9 billion to $3.1 billion as Friedman bets consumers will bite into his promotions.
“$1.5 billion in cash and $1.5 billion remaining in share buybacks create a floor for the stock, though we see limited upside given our view that 20% operating margins may not be on the table until 2025. We believe new product launches under the RH Contemporary line at more acceptable prices will boost demand in the second half, but not enough to exceed the midpoint of the guideline,” Jefferies analyst Jonathan Matuszewski warned in a research note.
RH’s struggles reflect in part Friedman’s poor execution, but also the realities of changing housing markets. The dynamic has tripped everyone from a high-end furniture retailer in RH in the past year to appliance manufacturer Whirlpool to home improvement retailers Home Depot and Lowe’s.
Existing home sales fell 3.4% in April from a year earlier, according to the National Association of Realtors. House prices fell for the third consecutive month.
A new Redfin report this week revealed that home prices across the country experienced their steepest fall in more than a decade in April, falling $18,000. Median home prices fell in 45 of the more than 90 metropolitan markets, the report found.
“We’re launching it [our new product line] in possibly the worst home environment at the top I’ve ever seen in my career. I’ve never seen luxury housing at the level we’ve seen in recent reports and we have 20 years of high interest rates,” Friedman added on the call.
The stage is set for a similar tone from Friedman three months from now.
Brian Sozzi is the editor-in-chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn. Tips on the banking crisis? Email to [email protected]
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