RH Says High Mortgage Rates Killing Demand for Luxury Homes, Furniture

Hopes for a near-term turnaround in the battered home furnishing category were dashed Wednesday evening (June 29), after high-end retailer RH told investors it expects consumer demand will continue to weaken through the end of the year.

In an outlook update released after the close of trading, the California-based retailer, whose stock has already fallen over 60% this year and who counts Berkshire Hathaway as its largest shareholder, blamed a mix of macroeconomic factors for the extended slump which it now projects will see its full-year sales decline by 2% to 5%.

“With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year,” RH President and CEO Gary Friedman said, adding that he expects “the next several quarters” will be challenging.

Navigating Headwinds

The grim update from RH, which shortened its name from Restoration Hardware five years ago, comes just four weeks after the retailer posted record quarterly results on June 2 that saw its sales rise 11% from a year ago — and almost 100% over the past two years — for the three month period through the end of April.

Even so, RH was cautious at the time and repeatedly pointed to a weakening consumer environment.

“Despite our record financial performance in the first quarter, we’ve experienced softening demand trends, which began at the time of the Russian invasion of Ukraine and have further slowed during market disruption over the past several months,” Friedman told analysts on the company’s Q1 earnings call.

While Friedman noted there had been a widespread return to discounting and promotions across the home furnishing industry, RH had chosen not to pursue that strategy, pointing to the brand erosion and business model destruction that happen to luxury retailers to go down that path.

“We anticipate the next several quarters will pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality, and choose not to promote our business while we navigate through the multiple macro headwinds,” the updated forecast concluded, pointing instead to long-term investments and performance.

Luxury on Trial

To be sure, RH has long sought to position itself as a unique high-end brand that caters to the home furnishing needs of the wealthy consumers within the broader luxury segment, a category that, until now, has proven to be among the most resilient during these ongoing economic challenges.

Whether the lowered sales forecast and consumer outlook at RH actually spills over into other luxury brands remains to be seen, but the belt-tightening trend has already clearly taken a toll across most of the retail industry, where everything from grocery stores to pharmacies to eCommerce sites have been hit hard.

As for RH’s direct home furnishing competitors, the past month and year have seen a widespread sell-off in a wide range of different players, including Bed, Bath & Beyond which just sacked its CEO Wednesday in the wake of weak results.

Other rate sensitive retailers with outsized exposure to housing and rising borrowing costs that have seen their share prices struggle this year include Home Depot (-33%) and Sleep Number (-60%), Wayfair (-75%) and auto retailer Carvana (-90%).

While we haven’t even hit the long, hot dog days of summer yet, it remains to be seen how aggressive retailers will be with their discounting, seasonal sales and excess inventory clearance efforts, and if it will even work to jumpstart demand among a growing number of consumers who are simply tapped out.