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Restoration Hardware
Ticker: RH
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Upon Further Review – Post 2Q26 Thoughts - 09/24/26
We often like to say that Restoration Hardware (RH) CEO Gary Friedman has many of the same traits as former Abercrombie & Fitch CEO Mike Jeffries. They both have a keen eye for the corporate jet – Gary more on the look of the cabin while Mike more on the look of the crew. Both come from the merchant world where the solution to all problems is almost always next season’s product. That’s the current story that Gary wants us to believe with the recent launch of RH Estates while at the same time he probably wants us to forget statements such as these about the super hyped but failed product launches of 2024: “This spring/summer, we'll be unveiling the most prolific collection of new products in our history”, “It represents a massive leapfrog for our brand”, and “will generate a level of excitement and serve as an inflection point for our business”. It’s not that we are against the new product, which we believe is an opportunity and likely will help the overall business. It’s just that this business seems to require a massive overhaul of its product line every few years simply to meet basic furniture demand while other retailers such as Williams-Sonoma find success simply editing the assortment on the margin. RH Modern is only ~10 years old and that was supposed to be the “first fully assorted and fully integrated modern lifestyle brand in the world”. Gary might not “think there is anything like RH Estates in the market today” but does that really matter?
The #1 way in which we often conflate Gary and Mike is through European expansion. Most investors today are probably unaware that Europe is ultimately what killed the old Abercrombie & Fitch story – not necessarily all the smoke from constant rumors about Mike. There is a cosmic sense of irony that Gary is reliant upon Mike’s old stores for success in his own European journey. This is the unique pain point of the RH story today, as merchandising (aka RH Estates) is what retailers are supposed to do on a regular basis. This note digs into the profitability drag from international expansion, which has only gotten worse in absolute terms. Gary’s decision to only focus on EBITDA guidance, as opposed to the EBIT guidance he also gave in the past, doesn’t change the fact that D&A matters.
We believe the reasonable range of 2026 EPS outcomes is $5.00 to $7.00 and are positively biased relative to consensus of ~$5.40. We have concerns about the international drag going forward but something about this business is working right now as the company had its highest customer deposits since 1Q22 (second highest in history too). Further, meaningful progress has been made on inventory (lowest days inventory since 2022), which likely speaks to the comfort management has with its margin guidance. It’s not difficult to visualize $4 billion of revenue in 2027 with EBIT margin approaching 10%, and the $9.00 of earnings power that implies is increasingly attractive at current valuation levels. However, this is not the same bullish story from several years ago as there are now structural challenges inherent in the business model that limit potential upside. Rates are always something you must watch with these names but with existing home turnover already at depressed levels we see only marginal demand risk.
Putting “Hard” In Hardware, “Ouch” In Couch - 04/01/26
Now the collective sell-side has published their only Restoration Hardware report until they put out an earnings preview in three month’s time, will explain what was super interesting to me about 4Q25. Not trying to make too much of a little thing but…the company made absolutely no adjustments to above the line operating income (EBIT). This was the first quarter that has happened since 3Q14 so certainly a rare event for most investors today. When you dig deeper, it’s the first time they haven’t adjusted SG&A since 1Q17. Super interesting coincidence as we explain further below.
“We're Building A Restaurant Company” - 03/06/26
Gary Friedman (CEO RH) seems to have an ongoing fascination with Ralph Lauren, or more explicitly how he thinks it isn’t a luxury brand. Meanwhile the furniture of RH couldn’t sell at a 25% member’s discount, so he had to increase that to 30% last year (standard discount level of Gap where he started career). And since that didn’t work either he recently increased the “clearance” discount to 70% from the 60% level it has perpetually run at since September 2023. Now it seems RH is apparently a restaurant business instead, so we decided to compare their first location in Chicago to the Ralph Lauren restaurant in the same city. But we didn’t stop there and took a deeper look into the entire “chain” of restaurants from RH. The big question here isn’t what each restaurant does in revenue in the first year or two but rather what happens afterwards when fanfare and hype of the beautiful new store begins to fade.
If you don’t know if you are either a furniture or restaurant company, then we are not sure the natural thing to do is open an expensive store in Paris where the mix of space is almost 60/40 (traffic more like 10/90). We recently visited RH Paris and provide our independent thoughts as we are no longer tainted by accepting invitations to grand opening galas like many of our former sell-side brethren still do (not all). Stunningly beautiful store but like similar Gary Friedman vanity projects (RH England, RH Guesthouse, RH Aspen, etc), it almost seems like the furniture itself was an afterthought to having a restaurant with a view of the Eiffel Tower (even if its closed 1/3 the year). What stood out most is the lounge bar which we demonstrate is almost a caricature of the “World of RH” and coin the phrase “timeshare chic” to describe.
This is one of those cases where it’s hard not to find challenges with the company but most of that is likely already embedded in the current valuation. There is real value here and regardless of ample criticism you find in this note, it seems we found the natural bottom in the stock until new information is released. If it doesn’t want to go down much further than $150 on a week like this (US invasion of Iran) than we are more inclined to respect the overall market view. We certainly are not as positive about the recovery path as the Street, but it is difficult to not visualize some recovery at this point. As the heavily criticized RH England demonstrates, international sales productivity is likely to improve over time and bring with it less of a margin drag. While we have questions about the longer-term viability of the company’s restaurant strategy, the cash flow yield generation appears exceptional for now and we don’t see a reason for that to change in the near-term. All it would really take to get investors highly interested in the story again is for Gary to slow down his empire building just long enough to digest ample investments made over the past several years. While he gave no indication of that on the last call (quite the contrary) we note history is filled with sudden changes, reversals, and contradictions in his mindset.
We believe the reasonable range of EPS outcomes this year is now $6.75 to $8.00 (which compares to current consensus of ~$7.00).
A EuroTrip That “Gary Doesn’t Know” - 10/9/25
After a highly disappointing start, the entire international growth story at RH ultimately comes down to just one store: RH Paris. As with all the other openings the early hype is exceptionally high, and optimism abounds towards the beginning of an entirely new chapter for the future of the RH brand. But RH hasn’t had a good track record of living up to that hype for several years now. At some point the excuses run out and investors are likely to conveniently remember the reality of how international expansion was a major obstacle for almost all US based retailers in history (including Home Depot, Walmart, etc).
We circled back to RH Paris now that it has been open for over a month to better understand the local reception after all the fanfare died down. Reviews of the restaurant provide ample consumer feedback and last-minute reservation availability is wide open even during what should be high traffic weekend days. Gary Friedman, CEO, used performance during the first six days of this store to justify new long-term guidance that the total company can double within the next five to seven years, which we also dig deeper into what that implies. Lastly, we investigated the continued heighted levels of promotional email activity and discovered that there appear meaningful diminishing returns as activity accelerated over the past year.
We believe the reasonable range of EPS outcomes this year is now $7.25 to $9.50. This compares to our prior expectation for a range of $7.00 to $11.00. We are negatively biased relative to current Street consensus. The next half year should be a highly critical period for the stock as any potential weakness in RH Paris dramatically changes the investment story. Current restaurant traffic at that location indicates fears in that regard may be warranted.
RH: Time For A Resto In Hype - 6/16/25
Circled back to Restoration Hardware after a few days of percolating 1Q25 results. Give quick hits on things that stand out but deep dives on international commentary and how sell side consensus numbers shook out. The net takeaway here is I am still negatively biased to the story. We maintain our $11.00 high end EPS scenario this year but decreasing the low end of the range to $7.00 from $8.00.
RH 1Q25 Preview: Sometimes The Discount Becomes Permanent - 6/8/25
It’s my favorite time of year as Restoration Hardware is set to report 1Q25 earnings this Thursday. Sentiment has shifted negative but never count Gary Friedman out! He certainly has reasons to stick it to Wall Street now that his corporate grifting is increasingly exposed. As always, we provide detailed thoughts.
RH’s Dreams Of SODOSOPA Delayed Again - 10/23/24
Restoration Hardware’s Aspen Guesthouse was delayed yesterday...again. Shady Historical Commission vote held on Rosh Hashanah prevented deciding vote Jewish member from attending. She complained and City Council holding public hearing in 1+ months.
RH’s International Disaster - 9/24/24
Have always been skeptical of Restoration Hardware’s aggressive European expansion. Now appears skepticism justified. Not just from management commentary tone change, but also PricewaterhouseCoopers audited data the UK government provides. Gary Friedman forecasted sales of $50-$250 million in the first year alone.