Can RH's (RH) New Pivot Help It Recover in the Furniture Market?

RH NYSE: RH—formerly Restoration Hardware—recently made some pivots that, under normal circumstances, would have seemed like some pretty sharp moves. The company branched out in a path that was a brilliant stroke of obvious-in-hindsight genius, bringing out some new lines of almost shockingly complementary business. But then, something happened to destabilize pretty much every industry on Earth, and left some wondering, is RH's new plan still valid? Should it even still be trying to stay this suddenly somewhat more dangerous course?

Why Didn't Anyone Else Think of That?

First, a look at RH's new plan. The idea is brilliant in its simplicity; since RH is a furniture retailer first, it needs a way to show off its goods to potential buyers. What better way to do that than to have its goods actually arranged in rooms? That's a real step up from the crazy-quilt jumble that most furniture stores use, in which what's available for sale is scattered all over the sales floor.

So RH got the idea to start offering hotel rooms for rent under the RH Guesthouses brand, homes for sale under RH Residences, and the yacht goes under the name of “RH3,” available for charter in the Mediterranean and the Caribbean. That's pretty much everywhere that someone who would charter a yacht in the first place would want to be.

What's more, the company was planning to—by summer 2021—have its brands available in both London and Paris, taking advantage of some of the most upscale, cosmopolitan trade in Europe.

And Then The Pandemic Hit

What was a brilliant idea even just three months ago ran into a metaphorical nightmare of razor wire and terror known as the Covid-19 pandemic. Suddenly, travel fell through the floor, and since virtually all of RH's expansion plans depended on travel in one way or another, the whole concept took on a darker cast.

Then the primary company earnings took a hit, like a lot of other retailers out there, most of which were forced into an at least temporary shutdown by local, state, and even the federal government for a while there. RH reported a loss of $3.2 million, which worked out to a loss of $0.17 per share. Revenue at least looked positive, coming in at $482.9 million, though down from both the FactSet consensus of $490 million and the previous year's earnings of $598.4 million.

The Doubters Followed

Analysts, meanwhile, looked askance at RH's expansion play. UBS analysts, for example, noted that the execution of this concept was going to be “complicated”, and that when it came to high-end home furnishings, there were a lot of other alternatives that people could run through. Wayfair NYSE: W, for example, has seen its own stock almost double in the space of three months. Meanwhile, Williams-Sonoma NYSE: WSM, posted positive first-quarter results only recently.

RH, meanwhile, took a hit from its restaurants and outlets businesses, UBS noted, so any recovery seen right now is likely more a matter of recovering losses from the first quarter than any improvement in incremental value. UBS further noted that, if RH's main business were already running smoothly, this would make more sense. Since the main business isn't running so smoothly, though, it makes less sense overall.

“...Defined by Our Vision, Not a Virus”

Give CEO Gary Friedman some credit, though; he's sticking to his guns on this. He declared that now was “...a time to be defined by our vision, not by a virus” in a letter to shareholders, noting that this was a move to offer a world-first concept while at the same time adding whole new revenue streams.

It's a safe bet that this is going to sputter for a while, but with travel stocks coming back, and even cruise lines managing to make something like recovery, RH's idea of exhibiting their goods in a perfectly-curated setting and charging people to live in such an environment might be a great move.

We've already seen some places try things like this; augmented reality systems, for example, have let us point a phone at a corner and see what a particular china hutch might look like therein or the like. While it hasn't exactly gone mainstream, the idea certainly has its credit. After all, how many times have you bought a piece of furniture only to get it home and discover that that is not what you thought it would look like? RH's plan lets you see furniture in a more appropriate setting, along with some extra bits and pieces that might complement the furniture in question. This makes the shopper happy and improves the revenue coming into RH.

Only time will ultimately tell if RH's travel business plans can work, but it's still likely a good idea. It just may have come at the wrong time.