Restoration Hardware: 2Q26 Immediate Call Postmortem
They might have beat revenue and earnings this quarter, but we also got a necessary guide down for the rest of the year. That might show some personal growth on Gary’s part as he often likes to take more of a “damn the torpedoes” approach to forecasting. The funny thing is the hockey stick in 4Q isn’t all that crazy given how many times we have seen that kind of volatility play out in the past (and we do seem to be in earlier stages of that upward trend for 4-5 quarters that has happened before). But the 4Q guide certainly doesn’t come across as conservative. Gutman was all over the acceleration in Q&A.
Lot of rambling today. Honestly it was very difficult to keep track of anything. Probably one of the hardest calls ever in that regard. Felt more like we were just bullshitting about the industry (after smoking a ton of weed). Especially on Max’s (Cowen) question - who BTW partied with Gary last night. As example: RH has a pizza expert in Europe, asked Max if he ate pizza last night, and apparently Gary doesn’t think Papa Johns has a chance against their pizza.
Gary’s point about the international drag getting better is probably the single best feature of this story. It doesn’t require a leap of faith toward customer acceptance of entirely new product – rather it’s just how the normal store maturity curve works for any retailer. Going from 450 bps in 1H26 to 250 bps in 2H26. Will only be 150 bps in 2027.
Still, Gary ducked Fernandez’s question about performance in Europe by trying to say that everybody isn’t in the cities in “August”. Well, he could have at least talked about the May to July time period of the quarter he just completed. And we are 10 days into September…By contrast, Floor & Decor recently was talking about August trends to date on its July 30th call (true story).
The average price point of Estates is “currently” 45% higher than existing assortment. Let’s see what happens next year when they have their 4th consecutive year of a perpetual 70% off sale for the business. If I was at a hedge fund, I would set a dedicated AI agent to only watch the RH website for ANY promotional activity that pops up with anything in the RH Estates catalog.
Zaccone from Citi was also partying with Gary last night in Greenwich. Certainly, he would never let that impact his opinion on the name… Of course, his question that was first in Q&A (planted maybe) was about RH Estates. Gary says the same things as before – nothing like it out there, nothing at this level of quality, etc. I will say the two pages of just finishes per product line that Gary kept going on about in the catalog were a bit weird in my opinion but understand what he was trying to accomplish there. Probably one of the few instances in recent years I like that he at least tried something new (because it didn’t require hundreds of billions of dollars to test).
“We don’t think about price so much as we think about value” – Gary Friedman, who is in his fourth year of a perpetual 70% off sale. “We don’t care about the price of anything” – LOL. To be fair I left the second part of that sentence out where he said “unless we like the design” but his ENTIRE brand primarily competes on price and has done so for a very long time now (despite an intent to be “luxury”). Gary said “most of us started in apparel” - well that does explain the perpetual discounting mentality but even the standard discount at Gap isn’t much more than 40% these days.
“Thank you Ralph”. Gary used those words to describe the old Ralph Lauren store they took over in Greenwich. Maybe as a show of thanks, he can stop his decade+ long campaign to tell us all that Ralph Lauren isn’t a luxury brand.
If 95.5% of the luxury furniture industry is done in physical retail stores, then why did RH historically do something like 40/50% of sales online in the past before they stopped breaking that out in FY18. Could it be that they just aren’t a luxury brand?
“(Americans) are not the most popular people on the continent right now” – guess that is the new excuse for the failed decision to spend hundreds of millions of dollars rapidly opening stores in Europe where his brand is unknown and his furniture aesthetic is unknown (at least he finally recently admitted that the furniture size is wrong).
It was really interesting to hear Gary talk about the bankruptcy of Saks and Neiman because those were luxury retailers. At least he isn’t ignorant of the idea that luxury retailers don’t always work out historically. But maybe he just doesn’t know that debt was the reason for those bankruptcies? Gary talking about Saks makes me laugh most though because their biggest problem with profitability 15-20 years ago (when I last covered the company) was that they could never ween their consumer off promotions.
Gary brought up idea that landlords are willing to take more risk on the new store format because it’s really just lots of smaller stores that can easily be converted to different use in worst case scenario. Don’t think I have heard that POV before but its solid IMO.
Nardone got good commentary on inventory. The are not clearing inventory to make room for Estates. Estates is going to be incremental to the assortment. It will not cause markdowns. “Category is very promotional right now” – Laura Alber at Williams-Sonoma doesn’t seem to have a problem with that…
All the market commentary most people love this call for: Gary thinks it might be too late to end the war before the midterms. Noticed the news about offering voters $5,000, which he called “interesting”. Called out Walmart getting a $2 billion refund that is all going to increased costs and not lower prices (same as Home Depot). “We are going to be in a higher cost world for maybe the next 6-12 months”. Even if war ended tomorrow there is too much inflation in the pipeline.
I know it’s a different person, but kind of funny to imagine a collaboration between the “other” Ed Hardy and RH. Maybe Gary can expand the brand’s TAM to the Britney Spears and K-Fed demographic?
Lastly, Gary is still in NYC after opening Greenwich store yesterday. He almost certainly has to be staying at his corporate penthouse pad at RH Guesthouse in Meatpacking District. Good time to drop by the Champagne and Caviar bar tonight?
*These are our unabridged quick thoughts and notes from the call. We get them out as soon as possible after the call ends. Management has given some topics to dig deeper into and will circle back afterwards with much more in depth work on what was mentioned. You can find that work (and more on Restoration Hardware and other retail/consumer research) at our website here: M Squared Capital
Originally posted on X and Substack.