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RH not as bullish amid down trends in high-end housing market; cuts outlook

The luxury home furnishings retailer reported mixed fourth-quarter results on Friday, with disappointing revenue and better-than-expected earnings. But what caught investors’ eyes was the company’s warning about challenges ahead.

In the report, Gary Friedman, CEO of RH, cited “continued weakness in our core business post the fourth quarter market volatility, the negative trends in the high end housing market, and our continued efforts to edit unprofitable and non-strategic businesses.”

Consequently, the retailer has lowered its revenue guidance for fiscal 2019 to between $2.585 billion and $2.635 billion, which is about 6% lower than its original projections.

It also lowered its profit guidance to $8.41 to $9.08 per share in adjusted earnings, down from the $9.30 to $10.70 it initially projected.

In the fourth quarter, RH’s revenue inched up 0.1% to $670.9 million (the prior-year period had an extra week). Comparable revenue was up 5% over the year-ago period, or 7% taking into consideration calendar adjustments.

Fourth-quarter earnings totaled $1.41 per share. Adjusted profit in the fourth quarter was $3.00 a share, topping analysts estimates of $2.85 per share.

Friedman reaffirmed his belief in brick and mortar and said that part of RH’s growth during the prior fiscal year was its ability to leverage its physical stores. He said that when it comes to profitability, many digitally native businesses have overlooked that the cost of marketing an invisible store is proving to be more expensive than physical experiences.

“While it’s certainly in vogue to launch a retail business online, the numbers do not reflect that it is more capital efficient and surely not more profitable,” Friedman said. “The simplifying assumption that digital was more profitable than physical, and online furniture businesses should somehow be confused with technology companies may prove to be misplaced as digital brands rush to build physical stores in search of growth and profitability.”

For the full fiscal year, RH posted net income of $150.6 million, or $5.68 per diluted share, compared to $2.2 million, or $0.07 per diluted share, in the prior year. Adjusted net income was $223.7 million, or $8.54 per diluted share, versus $89.2 million, or $3.05 per diluted share, in the year earlier.

Net revenues were $2.51 billion versus $2.44 billion. The company’s 86 stores accounted for 56% of total revenues, with 44% of business coming from direct-to-consumer channels.

RH is accelerating its physical expansion, with plans to five to seven new stores annually, up from a three to five new locations previously. The company will open five new sites in the second half of this year, and all with feature hospitality elements.

The retailer has several new brand extension plans its pipeline, including the launch of RH Beach House this spring and RH Ski House this fall. Another brand extension, RH Color, is being moved to next year. Additionally, we have plans to elevate and expand our assortments in key categories with the introduction of new bespoke collections as we pivot back to growth over the next several years.

As in past recent quarterly reports, Friedman acknowledged that the strategies the company is pursuing — from opening large specialty retail experiences while most retailers are shrinking in size or closing stores to moving from a promotional to a membership model to continuing to mail catalogs to steering clear of social media — are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry.

“We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape, and we would argue, will also prove to be equally valuable,” he said.
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