RH: 3Q25 Business Recap
The risks are real... so is the opportunity
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3Q25 Update.
RH reported 3Q25 results and the stock was up +6% the next day.
Revenues grew +9% y/y to $884mn, up from +8% y/y last Q. As we noted in our last update on RH, they were seeing demand ahead of revenue which suggested that revenues would re-accelerate in the back half of the year, a dynamic that began to materialize this quarter.
In the shareholder letter, they introduce a new table showcasing where RH is gaining market share from. While they have talked about competitors in the past, making a similar point of growth being higher than peers, this is the first time they put numbers around it. The inclusion of this table does make the shareholder feel like Gary has frustration with the stock price and investors not fully appreciating how tough of a market they have been operating in.
Having said that, LTM revenues of $3.4bn are still below peak revenues in 2022 of $3.8bn, despite opening up international, rolling out several new collections, and total galleries growing to 74 from 67. In contrast, Arhaus’s LTM revenues are their highest they’ve ever been at $1.36bn (versus their prior peak in 2023 of $1.3bn). Other competitors show a more mixed picture. Wayfair’s LTM revenues are $12.2bn versus their prior peak in 2022 of $12.6bn. Ethan Allan’s LTM revenues were $600mn vs their 2022 peak of $850mn. West Elm’s LTM revenues are $1.87bn versus a prior peak in 2022 of $2.3bn. This is all to say that no doubt RH isn’t the only player that is down from their Covid peaks. It may look like Arhaus is faring better than peers on a revenue perspective, but their operating margins are less than half what they were in 2022.
They also noted on the call that they are more cyclical than competitors because they have a smaller accessory business. RH originally exited that business to focus on higher end furniture (which typically carries better margins), but Gary noted on this call that they may have gone too far. They are now open to relaunching an accessory business but want to do it in an “RH way”. They won’t go back into items like holiday, which tend to be fairly reliable sales generators but usually carry a negative brand perception. Instead, they talked about stuff like branded candles or blankets. This could be another way for more customers to enter the brand without devaluing it.
RH opened its first freestanding interior design office, called RH Interior Design Palm Desert in California. CEO Gary Friedman stated that it’s already “generating a million dollars a month.” They also opened RH Manhasset in New York, but did not give any details on demand there. However, Gary Friedman did note that the RH Ocean Grill restaurant at RH Newport Beach will be their first $20mn+ restaurant and could reach mid-twenties in its second full year. He also disclosed that their restaurants on average produce enough operating income to cover 65% of the Galleries’ rent expense—this is of course in addition to being a key driver of traffic.
Tariffs were still a nuisance as they continue to shift their supply chain network. They noted that despite increased prices, demand is holding steady. However, at the same time you can find large online sales that reach as high as 60%. They didn’t talk about this on the call, but in the past they noted that only about 1/3rd of new collections were going to stay long-term and excess items they would discontinue (which often requires discounting). Nevertheless, a 60% promotion is surprisingly high. But the seemingly elevated sales activity did not weigh on gross margins much, which were 44.1% versus 44.5% last year in the same quarter.
Gary Friedman pointed to unexpectedly strong traffic at RH’s Paris design studio (which is attached to the gallery). He noted that traffic in the most recent six-week period averaged 62% higher per week than in the preceding eight weeks. He admitted to staffing issues, particularly in the restaurant where they had to fly staff from the U.S. over who didn’t speak French—which was clearly an issue to win over local French clientele. Nevertheless, they have already started to fix these problems and chalk it up to “learnings” as they launched in their first non-US speaking country.
Moving down the P&L, operating margins contracted slightly to 12%, down from 12.5% last year in the same period. However, interest expense is still consuming operating earnings to the tune of $57mn versus $106mn in operating income. Their debt load including operating leases stood at $3.75bn for the quarter. Long-term debt was $2.4bn, down $75mn from last quarter. They contemplated issuing a new convertible on the call and again noted the excess inventory they are carrying, as well as the potential for a sale-lease back on $500mn of real estate to help work against this debt.
Gary though is unfazed by the debt burden saying on the call: “At some point, we may refinance some of the debt at some point, like, who knows, we’ve got a lot of real estate, and we think we can monetize that overtime and our inventory has been high. We’re turning inventory into cash but-- I’m pretty comfortable, I lived on the edge of bankruptcy in my first 10 years. This is nothing.”
Inventory levels continued to improve, declining $82mn q/q and -11% y/y, as they work through excess inventory. As a reminder, they had $200-300mn in excess inventory from the launch of their new collections.
Looking ahead, for the full year, they expect +9% revenue growth with adj. operating margins of 11.6-12% and free cash flow of $250-300mn. They noted that they will see a -90bps operating margin impact from tariffs for 2025.
Overall, the quarter reflected improving demand trends and continued market share gains, partially offset by margin pressure and elevated interest expense. Revenue growth reaccelerated as anticipated, while inventory reduction efforts continued. At the same time, profitability remained constrained by tariffs, higher operating costs, and a leveraged balance sheet.
Their long-term plan still haven’t changed as they continue full throttle on the international expansion and new collections introduction. They also seemed more positive on the interior design businesses after seeing results from the standalone design studio in Palm Springs. Lastly, they noted they could also have an events business where they rent out their spaces to the right clientele. Initially they were against this, but see the benefit of being associated with strong brands (Chanel was listed by name on the call) in events that are attended by celebrities and well known designers.
In terms of valuation, RH trades at a $162 stock price which puts them at a $3bn market cap or a $6.9bn EV. With $3.4bn in current revenues and an unassuming mature margin of 15%, they trade at 17x mature earnings. However, the real upside is if all of these growth initiatives pan out and the housing market returns. They are targeting $5-6bn in revenues from North America alone, with international eventually being a bigger business than North America. Ultimately, 20% mature margins seem fair (which is less than their peak of 25%). If we just assume $6bn in total revenues, at a 20% margin that is 7x earnings.
No doubt there is a lot of execution risk with RH and the large debt burden could be existential. On the other hand, between the housing market and tariffs, they are already in a very tough economic backdrop, and it is possible this is the low point for them. An investor will have to decide if they believe in the multi-decade trajectory of RH and if RH can achieve at least a good portion of their ambitions.
Call Notes
The 6 weeks, the average per week is 62% higher than the first 8 weeks. And the first 8 weeks actually had more traffic as we -- I think, it’s still like the fall, and there was a lot of people in tariff and you had a lot of people coming in, and we still have very good traffic
Tariffs
But I think we’re proud of how we’ve been navigating the tariff situation with pricing, with mitigation, with resourcing, with vendor partnerships, with price increases, everything
Differentiation
We’ll do hard things and we do things that are unique and differentiated. And I think because we were more ambitious than others, we think more deeply than others and we’re not just managers of something. Managers arrange and organize the status quo. We’re leaders and leaders are leading people somewhere they’ve never been doing things they’ve never done. And leaders have to be comfortable making others uncomfortable
Necessity is the mother of invention. Our most important innovations were birth during the most challenging and uncertain times. Our strategic separation is a result of innovating and investing during these uncertain times, and this time is no different. Launching the most prolific product transformation in history of our industry and believe the launch of our new concept in the spring of next year will reaccelerate our growth and create another step change in our business. We’re building an iconic global selling platform that will likely never be duplicated in our lifetimes.
Market Share Gains
We believe most of the share came from the higher end and came from like -- it came to the showrooms and they came from the independents, and they came from the regional furniture stores and they came from the Ethan Allen of the world or people like that
This is the time to make moves and take market share and create real strategic separation on the upside of it, ready for the turn. And I don’t think anybody is going to be more ready than we are
We find it fascinating that the market chooses to reward companies that set remarkably low expectations and slightly beat them, versus setting high expectations, as we do, and at times miss them, while still meaningfully outperforming our industry.
Hospitality Progress
The RH Ocean Grill at RH Newport Beach is our first 20 million-plus restaurant, that we believe will reach the mid-20s in the second full year, and its cash flow next year might cover the rent for the entire 90,000 square foot Gallery
RH Interior Desing Office Opening.
We opened our first freestanding RH Interior Design Office in Palm Desert, California, with no product except for 2 small sitting areas in front of our designers’ offices. There’s 4 offices in the building and a workspace with clients. It’s a real freestanding customer-facing design firm, which really don’t exist in the world. It’s a real freestanding customer-facing design firm, and is generating $1 million a month in design business in 3,000 square feet with rent of $200,000 a year. You can do the math
How to Build a Luxury Brand in China
Someone asked the question, how do you build a luxury brand in China and the response was you build great stores in Paris, London and New York. And I heard that years ago, and I’ve always thought about that as -- I thought about RH -- and how do we unveil this brand. We built RH New York, and we opened it in 2018. And we said that was our bridge to Europe. So we did it a little backwards. And as we think about it for our business, it’s really -- probably Paris, London, Milan and New York. Because Milan is really the 1 of the prime capitals of the world, not only for design, but also for fashion. But it’s where the biggest design show in the world is Salone where 500,000 people go once a year, and it’s also the time we’re going to open RH Milan.
Experiences Focused
We have these unique architectural masterpieces and the ability to bring the right people because we have the right place. And I think it’s even more important -- things like everything is moving online, like I think people are dying for experiences. They’re dying for authentic connections not only with people, but with places and with history and with beauty and with food, and I mean how many nights can you order DoorDash or Grubhub, I mean I led the services when I get on time and I want to get some delivered, I don’t know, about anybody else on the phone, but I’d much rather go somewhere and see people and feel like it somewhere and connected.
We have created new equally immersive physical experiences that are massively more capital efficient than we plan to unveil on our next call
Long-Term Thinking
The thing I’ve learned and I’ve observed, I think so many people, they get so focused like a quarterly results that becomes their whole mission as a CEO or a leadership team is like, how do we make the quarter and they do a lot of stupid things to make a quarter that aren’t -- we’re in building or business model building or anything. And I just -- I think it’s not a smart way to build something great.
That trend should go 15 to 20 years, when you look at the cycles. And this is the first time we’re going to actually kind of lead a cycle. We usually say like don’t go too early on the wave like a surfer, you get a false negative, the wave will go underneath you. Wait until the wave breaks. Let us see people ride that wave, learn from it and then go on the wave
For further reading, check out our RH Extensive Research Report here.
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