Story Stocks^®

RH (RH +12%) is surging following its Q1 (Apr) results after it reported a surprise profit when a loss was expected. What is surprising is that the stock for this luxury home furnishings company is sharply higher despite missing on Q1 revenue and guiding Q2 (Jul) revs below consensus. However, investors were thrilled that RH reaffirmed FY26 rev growth at +10-13% despite the tariff headwinds and despite RH calling this the worst housing market in almost 50 years.

• Our quick take is that these results were better than feared. Recall that the stock gapped 40% lower in early April following its Q4 (Jan) report, wherein RH offered some very ugly guidance. That report was just a day after President Trump announced his reciprocal tariffs on April 2. It's important to understand that nearly three-quarters of RH's products last year were sourced from Asia, including 35% from Vietnam, 23% from China, and the remainder from Indonesia and India. As such, investors were rightly alarmed when some of the highest reciprocal tariffs were on Vietnam, China, Indonesia, and India, charging 46%, 34%, 32%, and 26%, respectively.
• RH said last night, that due to the significant and unexpected Liberation Day Tariffs announced April 2, shipments and resourcing efforts were disrupted globally. In response, and in order to mitigate risk, RH announced last night that it would delay the launch of a new concept that was planned for the second half of 2025 to the Spring of 2026 when there should be more certainty regarding tariffs.
• In addition, RH has continued to shift sourcing out of China and expects receipts to decrease from 16% in Q1 to 2% in Q4 with a meaningful portion of the tariffs absorbed by vendor partners. RH has also resourced a significant portion of its upholstered furniture to its own North Carolina factory. RH is now projecting that 52% of its upholstered furniture will be produced in the US and 21% in Italy by the end of 2025.
• In terms of the Q1 results/Q2 guidance, the surprise profit looks to have been achieved by margins coming in at the high end of prior guidance. And while RH expects the tariff disruption will hurt Q2 revs by 6 points, RH expects that will be recovered in the second half. And that is why RH reaffirmed full year revenue guidance. Also, RH guided to full year free cash flow of $250-350 mln after not guiding for FCF last quarter. Furthermore, RH expects significant and growing cash flow from operations and lower cap-ex over the next several years as it cycles through this aggressive investment period.

Our overall take is that investors came into this Q1 report bracing for the worst after the stock got hit very hard last quarter. This report could not have gone much better. Not only did RH report a surprise profit, margins were good, the tariff impact on revs seems limited to Q2 with RH regaining those sales in 2H25. That was evident with RH reaffirming its full year outlook. Also, RH is making good progress on reducing sourcing from Asia. All in all, the report was much better than feared.