RH

RH's second-quarter sales rose 2.6% to $922 million, above the firm's guidance for 0.5%-2.5% growth. Adjusted EBITDA margin fell 120 basis points to 19.4%, including a 600-basis-point tariff refund benefit. Excluding the refund, RH beat the high end of its EBITDA outlook by 40 basis points.

Why it matters: RH's investment cycle is past its peak, with much of its international buildout behind it. With fewer openings, the firm expects nearly 200 basis points of lower operating costs in 2027. Expenses related to the initial Estates launch should also abate. RH Estates should be a key sales driver as it attracts new customers and its prices carry a 45% premium over RH's existing assortment. With roughly 60% of US luxury homes reflecting classic styles and RH serving just 5%-10% of the market, we think the opportunity is compelling. If industry demand trends persist while RH innovates and expands locations, we think the firm will continue to surpass industry growth. Over the last three months, furniture and home furnishings retail sales were roughly flat (0.1% average decline), so RH has outpaced the market.

The bottom line: We don’t anticipate any material change to our $270 fair value estimate for no-moat RH and view shares as significantly undervalued. Shares jumped 8% after hours on Sept. 10 on sales and profit resilience, which we believe will persist long-term. RH updated its 2026 outlook for sales growth of 5.5%-7% (4.5%-8% prior) and adjusted EBITDA margin of 15%-16.2% (14.2%-16%), near our estimates of 5% and 14%, respectively. Guidance includes nearly $70 million in tariff refunds, which will mainly be used to offset supply chain costs. As expenditures roll off and new lines and locations begin to bear fruit, we think margin expansion and improvement in returns on invested capital should become easier to capture. As such, we model EBITDA margin and ROICs to reach 19% and 22% by the end of our forecast, respectively.

We are lowering our fair value estimate to $258 from $270 after incorporating second-quarter sales of $922 million and a 13% adjusted operating margin. Despite difficult macroeconomic conditions and the continuation of a weak housing market, RH still expects sales growth of 5.5%-7.0% in 2026, although costs are set to weigh on EBITDA margin potential, which is expected to come in at 15.0%-16.2% (pointing to a 170-basis-point decrease at the midpoint, with our estimate below the low end of the range given the current inflationary environment). We believe some costs stemming from RH Estates sourcebooks and European store openings will roll off later in 2026, providing a potential return to operating margin expansion in 2027. Our full-year outlook includes sales growth of 6% and a 14.2% EBITDA margin.

Over the next decade, our average sales growth forecast is 8.3%, within management’s historical long-term sales growth goal of 8%-12%. We think this incorporates the pipeline opportunities that RH can access. We believe sales growth should continue to stem from stimulus from source books, growth from adjacent offerings (hospitality, guesthouse), and square footage growth as RH converts gallery locations domestically and expands abroad.

We forecast RH’s terminal operating margin at 15.5%, reflecting the company's dedication to invest in growing an integrated luxury brand, which should offer the ability to tap into a larger total addressable market, rather than solely a furniture-seeking cohort. As such, we believe the company can achieve an average gross margin of 45%, significantly higher than prepandemic levels but rationalized from pandemic-related periods (49%-50%).

While some capital demands are set to persist given the international buildout strategy, we think eventually they will retreat. Domestically, the firm still benefits from an appropriate distribution center footprint and a sale-leaseback strategy across the real estate platform, supporting healthy returns. In our opinion, RH's operating strategy is set to deliver average returns on invested capital, including goodwill, that reach 21% in 2035. RH has generated average ROICs above our weighted average cost of capital assumption (9%) over the past five years.

We believe RH has built brand awareness across an affluent consumer demographic, thanks to its luxury positioning. However, given the intense competitive landscape in home furnishings, we refrain from assigning RH a moat. Despite high sensitivity to housing market conditions and an evolving brand image, the company has delivered adjusted returns on invested capital, including goodwill, that have averaged 18% over the past five years, fueled by pandemic-related demand, compared with our 9% cost of capital estimate. But with covid’s boost now in the rearview, we forecast average ROICs, including goodwill, to moderate to 10% over the next five years, just modestly above our WACC estimate.

While past efforts to reorganize the business and streamline strategy have improved profit and cash flow metrics (RH has generated positive free cash flow to the firm in eight of the last nine fiscal years), we remain concerned that nonexistent switching costs will weigh on the ability to consistently drive demand and raise prices throughout the economic cycle. This is despite our favorable view of the company's differentiated offerings (RH curates from artisans globally, which helps it merchandise strategically, and operates with an experiential store strategy) and its ability to read proprietary data and purchasing patterns from its direct-to-consumer business.

Our primary concern is that consumers can still search online for similar products at more competitive prices, bounding the firm’s prospects. For example, no-moat Williams-Sonoma is one of RH's closest publicly listed competitors, with around two-thirds of its sales from the direct channel and similarly catering to an upscale demographic through its Williams-Sonoma and Pottery Barn brands. Williams-Sonoma has had a consistent merchandising strategy in recent years, thanks to the consumer transaction data it has captured for multiple decades. Impressively, Williams-Sonoma has posted an average operating margin of 17.5% over the last three years, versus 11.9% at RH, signaling RH’s inability to either raise prices more or control costs better than other retailers in the industry. Also, numerous other upscale brands abound, including Arhaus, Ethan Allen, Roche Bobois, among others, indicating the magnitude of fragmentation across the high-end home furnishings landscape, limiting pricing power over long periods of time given a lack of switching costs. For some products, RH could also see competition from mass retailers, but we still largely believe companies like Bed Bath & Beyond (now tied up with Overstock and The Container Store) and Wayfair largely target a lower-income demographic, so we don't view them as imminent threats to RH's big-ticket sales.

Additionally, RH has undergone a heavy investment cycle in recent years, building out its international footprint and expanding into new verticals, which has weighed on performance as these efforts take time to prove out. While management expects that innovation in product lines, design compounds, ecosystems, international expansion, and new store formats should lead RH to see $5.4 billion-$5.8 billion in sales and a 25%-28% EBITDA margin by 2030, we think this is a bit aggressive; our 2030 projection includes $5.1 billion in sales and an 18% EBITDA margin as competition remains intense.

Furthermore, although we believe RH's brand and perceived quality carry weight, we view its core consumer as often swayed by economic conditions, particularly in the housing and equity markets. For example, the company was forced to be acquired by private equity during the 2008 housing downturn and suffered a $7 million net loss in 2010 (admittedly, the business model was materially different during the global financial crisis than it is currently). In tandem with equity market volatility at the end of 2018, RH experienced a sales decline of around 10% in the final weeks of December, and in the first quarter of 2020, as a result of covid, RH's sales contracted 19%. More recently, equity market volatility, softening luxury housing demand, and pricing missteps led RH to deliver a 16% decline in sales in 2023. We think examples of pronounced sales pullbacks indicate that product demand can come under pressure during periods of economic distress.

Although we don’t believe RH has a persistent competitive edge, we think it is cultivating a loyal set of repeat customers looking for product as well as ambiance and experience, as evidenced by those participating in the firm’s loyalty program (262,000 at the end of 2025, down fractionally from 265,000 in 2024, paying a $200 annual fee). With 78 brick-and-mortar namesake locations (excluding outlet, Waterworks, and Guesthouse) across the United States, Canada (spread across the geography, but centered in high-income locations), and Europe, we suspect the company is maintaining visibility through its physical footprint. The 27 existing hospitality locations, including Guesthouse along with the expansion of the hospitality footprint in new locations, should drive a rise in foot traffic at RH’s brick-and-mortar locations. However, this isn’t enough to extract continual excess economic rents, in our opinion.

RH continues to transform its retail footprint in North America. As new product lines are introduced (estates, for example) into an evolving footprint, sales to a broader addressable market could rise faster than we anticipate.

With locations primarily in the US and Canada and just eight locations abroad, international opportunities could offer significant location and revenue growth and rising global brand awareness.

Longer-term vectors for growth, including RH Hospitality and brand extensions, could elevate the total addressable market faster than we expect.

Low customer switching costs, along with the proliferation of e-commerce and mass-merchant competitors, could pressure operating margin expansion. High-end discounters could affect RH's market share.

Weakness in the equity and housing markets could constrain profit growth as consumers pare back discretionary spending during periods of economic uncertainty.

Intermittent promotional activity has created a challenging environment for many retailers, including home furnishing retailers, and could heighten competition for sales.