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RH (RH +23%), a luxury home furnishing retailer, is sitting pretty today after returning to delivering earnings upside in Q2 (Jul), snapping a string of misses. Tight monetary policy and a formidable housing market bottlenecked demand, leading to seven consecutive quarters of declining yr/yr revenue. Compounding the issue was RH's decision to invest aggressively, weighing on margins.

However, demand trends inflected positive last quarter, and RH rode this momentum through Q2, pushing sales growth back into positive territory. Importantly, the accelerating demand growth in Q2 has not budged thus far through Q3 (Oct), underscoring signs that perhaps RH has endured the worst of the current economic cycle.

• Relatively soft headline Q2 numbers reflected the hurdles associated with the current economic landscape, which CEO Gary Friedman described as the most challenging housing market in 30 years. Adjusted EPS contracted by 57% yr/yr to $1.69 on a sluggish 4% bump in revs to $829.66 mln. Demand grew below RH's +8-10% prediction, edging +7% higher. However, demand finished up +10% by July, gaining strength in August. RH anticipates a +12-14% improvement in demand next quarter.
• RH's decision to invest aggressively despite operating in a downturn led to an over 10 pt contraction in adjusted operating margins yr/yr to 11.7%. However, Mr. Friedman continued to stand by the investments, reiterating that it has positioned RH to capitalize on long-term opportunities.
• Opening new galleries underpins much of RH's investment plans. The company is looking to launch a Waterworks Showroom in California by Q4 while also developing a Sourcebook with test mailing planned for 2025. RH believes Waterworks, which it acquired in 2016, has the potential to grow to a billion-dollar brand, five times its current annual revenue. RH is also expanding in Europe, launching in Paris and Milan over the next two years. Additionally, elevating its online experience is a focus for RH, planning upgrades throughout 2H24.
  • Ongoing expansion and other investment initiatives are expected to continue weighing on margins over the near term; RH projects 11-12% adjusted operating margins for FY25 (Jan), down 3.5 pts from its prior forecast.
• The demand climate remains challenging, and RH does not expect this to shift until interest rates ease. Still, the company assumes demand trends maintain momentum, accelerating through the rest of FY25 and into FY26. Nevertheless, revenue will lag demand as RH reacts to new collections and reduces backorders. As a result, the company lowered its FY25 revenue growth outlook to +5-7% from +8-10%. However, analysts anticipated this, already resetting their models lower ahead of RH's guidance.

Leading into Q2 results, RH's peers sounded a few alarms. Wayfair (W) observed a continuation of cautious consumer spending in JunQ, Williams-Sonoma (WSM) reduced its FY25 (Jan) comp and revenue guidance in light of stubborn economic headwinds, and La-Z-Boy (LZB) issued bearish OctQ guidance. By delivering upbeat numbers and anticipating upward trends to persist, RH did more than enough to alleviate investor fears and support its surging stock price today.