luxury furniture retailer seeks growth not profit

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Profit margins be damned. That appears to be the main takeaway from RH, the luxury furniture store formerly known as Restoration Hardware.

By any measure, the third quarter was a lousy one for RH. Furniture sales — even high-end ones — are tied to the housing market. This has essentially been frozen as the 30-year fixed mortgage rate continues to hover above 7 per cent.

At RH, revenue fell 14 per cent to $751mn during the quarter. The company booked a net loss of $2.2mn, compared with a profit of nearly $100mn a year ago. Operating margins collapsed from 19.6 per cent to 6.8 per cent as the retailer and aspiring high-end lifestyle brand poured money into new lavish outposts overseas — including one in England — this summer and developing luxury housing.

RH itself concedes times are getting tougher. It will have to resort to more discounting amid a “frozen” housing market. It cut the top end of its full-year revenue guidance and sharply lowered its outlook on adjusted operating margin.

Prudent management would pause or halt some of the company’s ambitious projects until demand for its $12,000 sofas and dining tables recovers. After all, the company generated just $17.6mn in free cash flow during the third quarter. Cash and cash equivalents fell by more than $1.1bn to $380.7mn during the period.

But Gary Friedman, the chief executive of RH, is not one for conventions. “For the past 23 years we’ve heard others tell us what can’t be done . . . We avoided bankruptcy while being accused of lunacy,” he wrote in his shareholder letter.

Investors were not listening. The 15 per cent drop in RH’s share price on Friday suggests as much. The stock is down 67 per cent from its peak in 2021 but still trades on about 17 times forward earnings. The shares have traded at 10 times in recent memory. Friedman may see himself as a visionary. But his vision is best pursued with RH as a private company. Growth at all cost is so pre-pandemic.