RH, formerly known as Restoration Hardware, tumbled a whopping 13% after the upscale home furnishings retailer blamed high mortgage rates in the US for a surprise net loss in its third quarter and cut its 2024 adjusted operating margin forecast, warning that promotions will pressure its bottom line amid a "frozen" housing market.
RH "experienced increased headwinds in early October when mortgage rates peaked above 8%" and the Israel-Hamas war started, it said in a letter to shareholders while warning that it continues "to expect the existing housing market to remain frozen until interest rates and/or home prices fall meaningfully."
"Additionally, the home furnishings market has become increasingly promotional, and we believe that will create a mix shift toward clearance products, pressuring gross margins."
The California-based company, which counted Berkshire as one of its largest shareholders until Q1 when the conglomerate dumped its entire position, said on Thursday its business was hurt by elevated mortgage rates that peaked at 8% in October. That has rendered the housing market “frozen” until rates fall and is and reducing opportunities for affluent consumers to furnish new homes (since they are stuck in their existing homes until rates drop enough to allow new mortgage aorigination).
RH also described the furniture market as “increasingly promotional,” a trend that could put pressure on its high-priced offerings and margins.
RH lost $2 million, or 12 cents a share, in Q3, swinging from earnings of $99 million, or $3.78 a share, a year ago. Adjusted for one-time items, the company lost 42 cents a share, a huge miss to consensus forecasts of 94 cents a share. Revenue fell to $751 million, from $869 million a year ago, also missing estimates of $757 million.
Operating margins were below expectations due to higher-than-expected expenses, including international store openings, costs related to the pending acquisition of the New York Guesthouse property and "unsuccessful efforts to secure the iconic One Ocean Drive Miami Beach location," the company said. RH in September announced plans to "reimagine and restore" the public property.
In keeping with the often bizarre tone of its letter to shareholders, RH said it continues with its plans to "expand the RH ecosystem" where customers will be inspired "to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world."
"For the past 23 years we've heard others tell us what can't be done, and for the past 23 years we've failed... to listen," said the letter from eclectic CEO Gary Friedman. "Soon the world will be within our reach."