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Tuesday, June 15, 2021

A Moment Made for RH

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Home is where it’s at.

Luxury furniture retailer

RH

RH 15.67%

reported impressive sales growth in its first fiscal quarter that ended on May 1, with net revenue growing 78% from a year earlier, topping analyst estimates by a wide margin. Sales grew 44% from the comparable quarter in 2019, which was unaffected by the pandemic. RH shares jumped nearly 7% in after-hours trading Wednesday.

All things home—including home improvement—are having a bit of a moment on the back of strong housing demand and an expectation that employees will be spending a lot more time at home than they did before the pandemic. Furniture and home furnishing stores’ sales increased 21% compared with 2019 from February to April, the period that matches RH’s last quarter, according to data from the U.S. Census Bureau. Williams-Sonoma, which owns West Elm and Pottery Barn, saw a 41% jump in sales in its last quarter compared with the comparable period in 2019. The two home furnishing brands together make up a majority of its revenue.

As in many other segments of retail, supply chain issues are causing delays for the furniture sellers. Both RH and Williams-Sonoma noted in their respective earnings calls that they continued to face backlogs. Upholstered furniture production, in particular, is facing slowdowns because of a recent foam shortage, Williams-Sonoma noted in its earnings call. Still, neither of them expect the delays to dampen consumer demand: Both raised their guidance for the current fiscal year. RH expects to see revenue grow 25% to 30% in its current fiscal year, while Williams-Sonoma, which had a more resilient 2020, expects to see revenue growth in the low double-digit to midteen percentage range.

RH and Williams-Sonoma share some similarities. Notably, both carry high-end furniture, though RH’s products are generally pricier and branded as luxury. They also both bear the fingerprints of

Gary Friedman

—the current RH chief executive who worked at Williams-Sonoma for more than a decade, helping to conceptualize West Elm before he left.

Their current strategies look markedly different, however. Williams-Sonoma is on a path to reduce its store footprint by a quarter in the next five years in its quest to improve operating margins. RH, on the other hand, is doubling down on its physical presence, planning to open more stores—or galleries, as it calls them—and restaurants—both in North America and abroad. It even plans to wade into the hospitality and luxury homes business, with its first “RH Guesthouse” scheduled to open in 2022. RH’s bet is that physical presence is a better advertising tool with fixed costs rather than digital marketing, where costs are variable.

The results of those efforts have yet to fully play out. Williams-Sonoma is only at the beginning of its pruning process and RH hasn’t significantly changed its physical footprint either. So far, both companies have seen vast improvements in their profitability, with operating margins roughly doubling last quarter against the comparable period in 2019. RH’s operating margins are now 21.8%, comparable to that of luxury giant

LVMH.

Investors seem to find RH’s story a lot more exciting. Its shares trade at 30 times forward-12-month earnings, double that of Williams-Sonoma. That is despite the fact that the two companies’ pre-pandemic growth rates were comparable.

In a market hungry for growth stories, RH certainly knows how to sell one.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the June 11, 2021, print edition as ‘Furniture Retailer RH Has Its Moment.’

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