Q1 Profit Can't Justify RH's $180 Price Tag
GRAYS, ENGLAND - FEBRUARY 5: A general view of an RH Outlet furniture retail store at Lakeside ... More Retail Park on February 5, 2024 in Grays, United Kingdom. (Photo by)
Note: RH FY'24 ended on February 1, 2025
RH stock, the luxury home furnishings retailer formerly known as Restoration Hardware, surged over 15% in after-hours trading on Thursday after the company reaffirmed its full-year forecast and discussed strategies to address rising tariffs. RH anticipates revenue growth of 10% to 13% for FY 2025, demonstrating resilience in the face of macroeconomic challenges. Yet, the excitement quickly subsided—shares fell 1.18% in after-hours trading to $178.84 following a mixed Q1 earnings report that exceeded EPS expectations but fell short on sales forecasts. For investors looking for growth paired with lower volatility, the Trefis High Quality Portfolio has outperformed the S&P 500, delivering 91% returns since its inception, providing a steadier experience during turbulent times.
RH generates revenue through a combination of high-touch showrooms and lavishly curated catalogs, available both in print and online. Its product offerings include furniture, lighting, textiles, bathware, garden products, and even teen furnishings—aimed at affluent consumers with a focus on design-forward aesthetics and premium prices.
The company reported a net income of $8.04 million ($0.40 per share) for Q1, reversing a loss of $3.63 million ($0.20 per share) from the previous year. Revenue increased 12% year-over-year to $814 million, coming just short of analyst expectations. Adjusted operating margin hit 7%, with EBITDA margin at 13.1%. Nevertheless, RH contends with significant obstacles: a sluggish housing market—characterized by CEO Gary Friedman as the 'toughest in almost 50 years'—and escalating tariff pressures threaten future earnings.
The company detailed aggressive supply chain changes: RH is shifting production away from China, with imports from the country expected to decrease from 16% in Q1 to just 2% by Q4. The company aims to produce 52% of its upholstered goods domestically in the U.S. and 21% in Italy by year-end. However, these adjustments come with costs—tariffs are anticipated to impact Q2 revenue by approximately six percentage points.
RH has also postponed the introduction of a new concept to spring 2026 amid tariff uncertainties. Despite these challenges, it is advancing with global expansion plans, with a flagship store set to open on Paris' Champs Élysées in September. The company intends to launch 7–9 new galleries each year, focusing on major cities such as London and Milan.
Investors should be wary of RH's historical performance during downturns. The stock fell 71% during the 2022 inflation shock—nearly three times the S&P 500's 25% drop—and 68% during the 2020 pandemic crash. While it bounced back quickly post-COVID, it has yet to regain its 2021 highs. RH's heightened sensitivity to macroeconomic shocks raises questions about its sustainability during a potential recession. Our dashboard How Low Can Stocks Go During A Market Crash captures the performance of key stocks during and after the last six market crashes.
With a valuation of approximately 45× forward earnings, RH trades at a significant premium compared to both its five-year average (38×) and the S&P 500 (26×). Its price-to-free-cash-flow ratio is particularly concerning (>200x, versus 21x for the S&P index), indicating that investor expectations may be outpacing the underlying fundamentals.
Following a post-pandemic demand boom in FY 2020, RH experienced a turbulent stretch from FY 2021 through FY 2023 as rising mortgage rates, inflation, and declining housing markets pressured results. FY 2024 provided a degree of recovery, however, investor confidence remains fragile. Tariffs and the weak housing market continue to impact the outlook, despite operational enhancements.
RH is undertaking a significant shift—restructuring its supply chain, expanding globally, and enhancing margins. However, the stock remains volatile and highly valued, with a history of significant declines during challenging times. Trefis partners with Empirical Asset Management—a wealth management firm in the Boston area—whose asset allocation strategies yielded positive returns during the 2008-09 period when the S&P lost more than 40%. Empirical has integrated the Trefis HQ Portfolio into its asset allocation framework to deliver better returns and reduced risk for clients compared to the benchmark index—a smoother experience as evidenced in HQ Portfolio performance metrics.
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