RH delivers gloomy guidance after Q4 results miss as housing market weakness bites

March 29, 2023 5:05 PM EDT
(Updated - March 30, 2023 8:31 AM EDT)

By Yasin Ebrahim and Geoffrey Smith -- Shares in RH (NYSE: RH) fell over 5% in premarket trading on Thursday after the luxury lifestyle company warned that successive interest rate hikes would put a chill on its core businesses for some time to come.

The company, which specializes in furnishings and fittings for luxury homes, bemoaned the fact that luxury home sales had fallen a "dramatic" 45% in the last quarter from the previous year's levels, as more and more buyers bumped up against affordability constraints.

"Add to that an underperforming stock market, and a banking crisis no one saw coming and the data points to business in our sector likely getting worse before it gets better," RH said in its quarterly letter to shareholders.

Adjusted earnings per share fell by nearly half to $2.88 in the three months through January, well below forecasts for $3.33 a share, while revenue fell by 15% to $772 million.

The disappointing numbers were the result of heavy discounting to cut surplus inventories, as the company was surprised by the sharp slowdown in demand at the end of last year. RH had previously been one of the big beneficiaries of the pandemic, when locked down consumers diverted more of their spending to home improvement, helped by generous government handouts and low interest rates.

The company's guidance for the first quarter of the new year was also disappointing, at a range of $720M to $735M, markedly below analyst estimates for $831M.

On a conference call with investors, management also indicated that the company's operating margin would fall by around 6 percentage points to around 16% this year, as cost savings in the U.S. are offset by the cost of scaling up operations abroad.

Looking ahead, the company said it continued to "expect business conditions to remain challenging for the next several quarters and possibly longer," but will continue efforts on "reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality."

Citigroup analysts noted that management is still targeting an operating margin of over 25% in the medium term, but cut their price target to $330 a share from $380 previously on the outlook for profitability in the near term. That's still around 35% higher than Wednesday's closing price.

Revenue for 2023 is expected to be between $2.9B and $3.1B.

By 08:50 ET (12:50 GMT), RH stock was down 6.2% in premarket trading at $230.02, on course to open at its lowest in five months.

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