(Members can get a PDF of this post here).
2Q25 Update.
RH reported 2Q25 and revenues grew +8% y/y, down from the +12% y/y they did last Q. This isn’t surprising given this is the first full quarter that the tariffs impacted operations. In the letter they note that they have gained share and see demand currently ahead of revenue, which suggests a re-acceleration of revenue is to come in the back half of the year. It’s worth mentioning though that public competitor Arhaus also had a strong quarter, accelerating revenue growth to +15% (albeit on a lower revenue base).
RH disclosed that RH England is enjoying a strong reception with $37-39mn of demand expected in 2025. This is in line to slightly better than their initial expectations with England given its proximity away from a populous city center. The idea was always to introduce the brand in a big and novel way, while elevating it, which they have achieved. While the sales figures are relatively inconsequential for their business, the bigger takeaway is that the brand is being well received.
RH opened their Gallery in Paris on the Champs Elysees in the first week of September. Gary spent several paragraphs in the letter explaining all of the unique things they did to make the seven floor gallery memorable. All of this is aimed at providing a sort of “wow” experience for the consumer to help elevate the RH brand.
Other than new Gallery opens, the big topic was tariffs on the call.
China supply chain exposure has been whittled down over the past few years and is expected to be just 2% by 4Q (from 16% this quarter). They note that their vendor partners are currently absorbing a meaningful portion of the tariffs. The newly announced 50% tariffs on India will impact about 7% of their products.
Due to the tariffs, they continue to delay their brand extensions that were planned for the second half of 2025 and Spring 2026. They also delayed the shipping of their interior source books, shifting $40mn of revenue into Q4 and 1Q26.
Despite tariff pressures, gross margins expanded sequentially to 45.5%, +180bps q/q. Operating margins also improved sequentially to 14.3%, up from 6.9% last quarter and 11.6% in 2Q24.
However, interest expense still remains meaningful, consuming $57mn of their $128mn in operating income. But this is an improvement from last quarter where it was actually higher than EBIT. Their debt load, including operating leases, stands at $3.75bn, down about $50mn from last quarter.
Inventory is down $50mn q/q, which helps them unlock more working capital, but is still elevated. As a reminder, last quarter they noted they had $200-300mn in excess inventory from their launch of new collections. As they learn what works and doesn’t, they prune their lines.
For the full year they expect 9-11% revenue growth with adj. operating margins of 13-14% and free cash flow of $250-300mn.
Business Commentary.
RH continues to execute on what they can control with their work on the Paris Gallery garnering more foot traffic than RH NYC received. They are slated to open London and Milan in Spring 2026, which is going to give them a European foothold in several key cities. RH England is also doing well, despite a somewhat slow start.
The big near term focus though is tariffs and how they could potentially impact the supply chain. The Trump administration is leading an industry “investigation” to see the feasibility of onshoring the production of furniture. Gary Friedman makes clear that this is not realistic and it would take many years to build up that production capacity. However, he does note that they would be able to weather this relatively better than peers, but that it would still be a net bad for the industry.
While RH has no doubt endured a tough macro environment from high interest rates and depressed luxury home sales to tariffs, Gary’s vision for RH has remained remarkably consistent. They maintained their gallery expansion plans and never wavered in the belief that if they build very elevated and cool stores and experiences, that the traffic would come. They know that this traffic will eventually translate to sales.
Some investors and analysts like to point out that RH now regularly discounts their furniture and that’s not how a true luxury business would behave. That is true. However, RH has never been a true luxury business, nor does it need to be. (In our LVMH report we talked ad libitum about the luxury business and there are far fewer true luxury business than many people think).
It also is true that the furniture business is heavily influenced by the trade industry where it is expected that interior designers will receive special trade discounts versus stated retail prices. Whereas a true luxury business will almost always own 100% of their distribution, it is rare for furniture companies to do so because of their high reliance on designers to purchase and “resell” their products to their clients with mark-ups.
While RH does mimic this industry quark by offering discounts, they do so with a twist: the discounts can be received by anyone that is a Member. In contrast to other furniture makers though, RH does own all of their own distribution. (However, they also have outlets which is another knock against saying they are a true luxury businesses). You can only buy RH furniture from RH Galleries. If a consumer decides to let a 3rd party designer stand in the middle of that transaction, that is their choice. This is also why RH has their own in-house interior designers—the idea is to try to circumvent the traditional industry selling process as much as possible.
It still is true though that discounts don’t do their brand any justice in terms of trying to “climb the luxury mountain” though. Nevertheless, there is no luxury product that has a similar industry dynamic to furniture, making it a little hard to judge them on the use of mark-downs as a barometer of “luxury” status.
In short, we wouldn’t feel compelled to argue that RH is a “true” luxury brand. Rather RH is a high-end brand that uses its elevated branding as a customer acquisition strategy to circumvent the typical designer trade heavy business. The Galleries are not just about showcasing their products but attracting consumers in a manner that doesn’t rely on regular advertising and distinguishes them from competitors. There are many businesses that do very well that are not true luxury, but are still very high-end. Gucci does a lot of luxury “no no’s” from having outlets to discounting, but they are still one of only a handful of fashion/ leather goods brands to ever have achieved over $10bn in annual sales. (Yes their business is in the doldrums now, but in absolute it is still a better business almost all other fashion/ leather goods businesses).
While the level of promoting we’ve seen RH do, including increasing their standard membership discount to 30% from 25% previously isn’t a signal they are successfully moving up market, it is indicative of the current realties of the furniture business. Gary Friedman may have a strong vision, but he has historically always been a little flexible when the business is facing setbacks, as it currently is. While two decades ago that meant reintroducing some gimmicky tchotchkes in their stores to support sales, today that means increasing their promotions.
In hindsight, it does seem they got a little over their skis in 2021 in terms of believing they had progressed more than they really had in the “climb up the luxury mountain”, as stimulus and covid supported demand made their business look especially strong. Today, the opposite is true. The macro environment makes them look weaker than they really are. These ups and downs are typical not just of any business trying to transform itself, but especially of a business that’s core product is a nondiscretionary, nonessential, high ticket price item.
While the quarters and years tick by for RH without meaningful financial improvement, the thesis hasn’t materially changed. If an investor thought they would be able to disrupt the typical trade designer model by going D2C with high-end Galleries and hospitality experiences that elevate the brand and draw traffic in order to later convert them to customers, nothing over the past 2 years likely changed their minds. Though the level of promotions is a mild negative, given the long history of RH transforming the business with periodic setbacks, it is likely nothing that an investor with a sense of their history would consider to be revelatory. The biggest change in our opinion is the issuance of >$2bn of debt to conduct what became effectively a levered buyback. This introduced bankruptcy risk, even if very remote, into the equation.
Of course, every investor must make their own judgements, and a higher potential upside may allow them to accept more risk.
Valuation.
In terms of valuation, RH’s current $230 stock price puts them at a $4.2bn market cap today or an $8bn EV. On an LTM P/E ratio, it looks very unexcited at 42x earnings. However, current earnings have a lot of growth expenses embedded from their international expansion. They also should enjoy a lot of operating leverage as sales increase, as they saw in 2022 when earnings were almost $580mn higher (they currently trade at 7x those peak earnings, even after adjusting for their higher interest expense). We try to focus on what we think long-term normalized earnings could be in order to get around this cyclicality.
RH maintains that North America can be a $5-6bn business and thinks international will eventually be larger than North America. As Gary Friedman said on the call: “If the early reads coming out of RH Paris are an indication of what’s to come, RH Europe and the Middle East should enable us to double the size of RH over the next 5 to 7 seven years.”
Peak operating margins were 25%, but even if we just assume 15% GAAP margins (versus 11% today) and they get to $5bn in North American revenues and another $3bn internationally, that is a NOPAT of $950mn. At 18x, that is an EV of $17bn. After backing out debt, that is a 3-bagger given their current market cap of $4.2bn. This also leaves some upside from international being even bigger than North America overtime. Of course, this all assumes very material growth and that the worst case scenarios—namely an ability to refinance their ample debt load—do not crystalize.
*At the time of this writing, one or more contributors to this report has a position in RH. Furthermore, accounts one or more contributors advise on may also have a position in RH. This may change without notice.