Shares of luxury furniture company RH(NYSE: RH) cratered on Friday after the company reported financial results for its fiscal first quarter of 2024. Management says it's "investing aggressively" in the business during "the worst housing market in 30 years," which is a tough way to inspire investors. As of 11:50 a.m. ET, RH stock was down 18%.
RH's profits disappoint
RH's Q1 ended on May 4. During the quarter, the company generated net revenues of $727 million. That was down by less than 2% year over year, which wasn't bad, considering the headwinds in the furniture space right now. But its profit margins disappointed.
RH's Q1 cost of goods sold was up compared to the prior-year quarter, even though its revenue was down. Its operating expenses were also up year over year, leading to an operating margin of just 7.5% compared with 13.4% in the same quarter of last year. This resulted in a lower profit than investors expected for RH, which is why the stock is dropping so sharply today.
When will business pick back up?
RH continues to open new locations, including expanding into Europe. It also plans to open a showroom for its bathroom brand, Waterworks, later this year. But this is illustrative of why things are difficult for the company right now. Its stores are usually quite large and are intended to showcase the luxury flavor of its offerings. This gives the business high fixed costs, and when sales slump, as they are now, so too does profitability.
RH may indeed be well positioned for when housing sales rebound, particularly when a rebound happens at the higher end of the real estate market. But it's unclear when that will happen exactly. Therefore, investors seem content with avoiding the uncertainty surrounding RH stock right now.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.
