Restoration Hardware 3Q25 Immediate Call Postmortem
Am I the only person that read the shareholder letter and felt like Gary was angrily typing various sentences in all caps because he thinks everyone else is stupid? Was certainly a very different format than anything we have ever seen before from this company. The fact he proactively put in a comp table relative to other furniture companies as if nobody follows this stuff was extra interesting.
Really like that he points out how the restaurants largely cover the rent of newer galleries. Of course, the restaurant business can be quite fickle. For example, we were just in the Newport Beach store on Sunday and it’s much easier to get a reservation at RH Ocean Grill than it is at the long-established chain restaurant Houstons.
They now expect a full year EBIT drag from international of 210 basis points, which is up from the 200 basis points mentioned in 2Q25 and 180 basis points in 1Q25. Clearly this means international is getting worse than expected. We also didn’t get an update on RH England like they have done for past few quarters – wonder why? At what point will the EBIT drag from international stop getting worse?
Gary once again takes a swipe at the idea that Ralph Lauren is a luxury brand. I dunno Gary – their store in Paris seems to do quite well. They also haven’t run a perpetual 60% off promotion since September 2023 and their stock is trading at an all time high.
RH Paris is the only building on the Champs-Elysée’s that doesn’t have an entrance on the Champs Elysée’s. Well hell Gary – that makes me just want to buy your furniture right now. Wonder why that didn’t help Abercrombie?
Gary acknowledged the issues we called out in our last report regarding RH Paris (see website as RH always free). Apparently, they got behind in hiring for the restaurants because it’s more difficult over there due to longer employee tenures. They had to bring over employees from the US who didn’t speak French. So, they are learning so much about Europe such as language matters. You have to be kidding me – does anybody at this company think about operations ahead of time or do they just spend stupid money (from shareholders) building it in the hope people come? “I love our strategy in Europe. Is it more expensive than we though, yeah!” – Gary Friedman
Regarding the new concept, have not been more excited about anything. Well that’s reassuring because they were super excited about lots of stuff over past several years and we all see how that turned out afterwards. Targeting biggest architectural block for the high end and expect it to be worth a few billion in sales in next 5-10 years. “It’s not only big, it’s the next trend”. Plan to launch at Milan design show. “This is the first time we are going to lead a cycle” – Pretty sure they were ahead of most on the Modern launch so not sure what he is talking about. Started talking about the Michael Taylor brand they bought and then how he is giving the competition a heads up.
Lasser asked best question ever. Would it make sense to slow all the new initiatives to bring a bit more predictability? Gary said if he thought otherwise, he would have written that in the letter. He then goes to blame Wall Street for short-term thinking. “Let’s lower expectations. Let’s make sure we make the quarter. That’s a downward spiral for most companies”. Thanks Gary – that’s really reassuring given that it’s now been MANY YEARS since your failed international expansion began. He levered up the balance sheet to dangerous levels just to effect a short squeeze YEARS ago. None of this criticism is based on quarterly myopia.
“You’re not going to love my follow up” – Michael Lasser, #1 US Retail Hardlines analyst. That my friends is what it takes to get to the next level. And he kept trying to move forward to the next question through Gary’s filibustering for well over a minute.
“I’m sorry I am making you uncomfortable. That’s what I do” – Gary Friedman. I get the point he is trying to make but he certainly seems to go all out in this regard in an unnecessary manner. “We just had China and Russia fly bombers over Japan”. He brought up the word “bankruptcy”.
The handlers let Gary go loose on this call after a few quarters of tightly controlling the message. God bless them.
*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 the website here: M Squared Capital
Originally posted on X and Substack.