: RH takes its business inspiration from architecture and the dead

RH is anticipating the return of fun, but its business takes cues from the dead.

In his letter to stakeholders accompanying the company’s first-quarter results, RH Chief Executive Gary Friedman explained some of the attributes of the company’s business model.

Friedman says RH has become a “luxury brand generating luxury margins” for a few reasons, including its 2016 move to a membership model, its luxury positioning, which makes it less vulnerable to economic downturns, and its calendar-agnostic inventory.

“We don’t offer seasonal categories like Valentine’s Day, Easter, Halloween, Thanksgiving or Christmas,” the letter said.

“Nor do we carry collections or color palettes tied to spring, summer, fall or winter like many home furnishings or home improvement retailers. We spent years eliminating those categories to avoid seasonal markdowns, enabling us to have a significantly higher margin business.”

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Where the company does take inspiration is from architecture and the dead, Friedman said.

“Our business is not driven by the fashion cycles found in retail models that require frequent discounting,” he said.

“Architectural trends tend to change over decades not years… As it relates to the dead, generations pass away and their belongings move through estate sales, which feed the antique markets, which drive the high-end interior design market, which influences the high-end reproduction market, and the trends continue to flow downstream. If you want to know where the Mid-Century Modern trend came from, do the math or visit a cemetery.”

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In addition to its furniture and design businesses, RH is also planning for private planes, a yacht, luxury homes and guesthouses, a spa and more. The company already has restaurants and cafes, with the rooftop restaurant at RH Dallas, which opened in May, is booked until August.

New “galleries” are coming to San Francisco, Oak Brook, Ill., and Jacksonville this year.

“We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world,” the letter said.

RH is also turning attention online, with a digital portal launching in the fall, and abroad, with RH England coming in spring 2022. The company has five European locations secured with five others in the works.

RH reported earnings and sales that beat expectations late Wednesday, and raised its guidance for the year. RH

is also forecasting 25%-plus adjusted operating margin over the next several years, up from 21.8% in fiscal 2020, and $5 billion to $6 billion in North American revenue.

The company has ultimately set its sights on becoming a $20 billion to $25 billion global brand.

RH stock soared 14.8% in Thursday trading.

See: RH stock pops as retailer increases sales guidance after another earnings beat

Analyst groups raised their price targets after the results were announced.

“Bigger picture, RH continues to redefine luxury in furniture, affording it persistent pricing power, and has strong potential to amplify and extend its brand in multiple directions to drive continued accretive long-term growth,” wrote Wedbush analysts.

Wedbush rates RH outperform with a $720 price target, up from $700.

“We rate RH overweight because we believe the ongoing real estate transformation (US and international) and redesign of its operating platform offer visibility into sustainable sales growth and multi-year operating margin expansion,” wrote JPMorgan in a note.

JPMorgan raised its price target to $770 from $750.

“We are constructive on RH’s guidance and see room to beat and raise throughout the year on sales and margins as the macro environment remains favorable, RH fills the high-margin demand backlog which expanded to 23% (est. ~$110mm), and restaurants and other businesses continue to normalize,” wrote Cowen in a note.

“Also, RH is poised to begin introducing significant newness in 3Q, although if demand and the backlog remain elevated, the launch may be delayed.”

Cowen rates RH stock outperform with a $750 price target, up from $680.

RH Contemporary is aiming for a 2021 launch with a 400-page catalog, or “Source Book,” an advertising campaign and a gallery location in San Francisco.

RH stock has rallied 58% for the year to date while the S&P 500 index

has gained 12.9% for the period.

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