Analysts Weigh In on RH’s Europe Expansion After Company’s Q1 Miss

MILAN — has a lot going on these days, with the rapid development of its RH Galleries across Europe and the U.S., expanding sourcebook offerings as well as the Waterworks luxury bath and kitchen business it bought in 2016, and its residential business.

And on Thursday, the California-based luxury -maker’s numbers disappointed the markets as it reported a $3.6 million net loss, compared to $41.9 million in net income in the prior-year period. Net loss per share was 20 cents as expenses rose across the board and demand slowed up to 3 percent in the quarter, slightly below RH’s guidance. Analysts from Baird, for example, expected an adjusted loss of 13 cents a share.

Total other expenses, for example, were $57.9 million versus $39.2 million in the first fiscal quarter of 2023. Net revenues were slightly above expectations at $727 million down from $739.2 million in the same quarter of 2023.

The net loss forecast miss sent RH shares down over 18 percent in Friday morning trading, underperforming the NYSE index, which traded nearly flat after market open.

“They [RH] missed EPS vs consensus due to margins being modestly below expectations and a higher-than-expected tax rate,” Seth Basham from Wedbush Securities told WWD.

In the first quarter, RH forged full speed ahead with its ambitious European expansion plans with the opening of two international Galleries, one in Brussels, and one in Madrid. Last year, RH made its with the opening of RH Düsseldorf, The Gallery on the Königsallee and RH Munich, The Gallery on Sendlinger Strasse and . Milan, Paris and London remain key, according to RH chairman and chief executive officer Gary Friedman. Industry leaders here say introducing RH to markets like Milan and Paris, international hubs for , will be a challenge given the housing slowdown and sky high inflation tightening consumer purse strings across the continent.

“Europe is a still a big question mark. It has been a slow build there and success won’t be clear for at least a year, after they open galleries in Paris and London. Their move into Europe is an uphill battle with limited visibility to them achieving a strong return on investment,” Basham said. Wedbush maintained its neutral rating, erring on the side of caution regarding RH’s ability to attract new and existing customers through heavy advertising and new gallery openings, which is “a strategy being undertaken when category consideration remains broadly muted and unlikely to change much in the near term,” analysts said in a note.

Analysts at TD Cowen maintained their buy rating on the shares, but among the risks to its target price of $325 from $350 are “missteps in opening European galleries.” Other factors include greater than anticipated supply chain disruptions and delays leading to higher than expected cancel rates, and stock market volatility yielding a decline in outlays.

Baird’s Peter Benedict said RH pegs the international opportunity for the brand in the range of $15 billion to $20 billion. “While international expansion elevates execution risk, the long-term opportunity is potentially compelling.”

With first-quarter , Friedman held steady on 2024 guidance of 8 to 10 percent revenue growth for the full year, despite operating in what he describes as “in the most challenging housing market in three decades.” Friedman also expects demand to post a rise of 12 to 14 percent for the full year. Second quarter demand is expected to be up 9 to 10 percent despite a spending slowdown in April.

“While aggressively investing in the downturn has put pressure on short-term results, it also positioned us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation,” Friedman said in the conference call, reiterating that he’s focused on a long-view game.

Friedman may see some fruit of his efforts by the first half of the fiscal year. Several catalysts remain, TD Cowen writes. RH is expected to double its circulation of contacts, especially amid the widespread circulation of its various sourcebooks — its second contemporary sourcebook with new collections expected for August.