RH’s CEO says he has raised already expensive furniture prices too much to bother buyers

Another winning cycle brings with it another outspoken call from outspoken furniture retailer CEO Gary Friedman.

After essentially saying in a conference call in late March that the housing market was collapsing under the weight of higher interest rates, RH’s top executive said late Thursday that he and his team overpriced already expensive furniture for the rich in good times would have calculated.

“I think the world has put prices up and we all know that because inflation has gone to its highest level in 40 years, right? an environment of simple demand,” admitted Friedman. “And when the simple demand environment has subsided and we face a real challenge, the question becomes: will our value equation create the level of demand that we think is right for the company?”

Judging by the latest findings from RH, formerly known as Restoration Hardware, consumers see no point in buying one Wood dining table for $2,300 on a credit card with a much higher interest rate. This is especially true as the real estate market remains under pressure.

The California-based home furnishings retailer’s first-quarter sales fell 23% year over year to $739.2 million, it was reported Thursday. The gross profit margin fell to 47% from 52.1% in the previous year.

Friedman said RH will now work vigorously this year to shed excess inventory by offering rebates that will eat into margins.

Adjusted operating margins for the full year are 14.5% to 15.5%, down from 15% to 17%. Revenue for the year was forecast at $3 billion to $3.1 billion, up from $2.9 billion to $3.1 billion, as Friedman bets consumers will embrace his promotions.

“$1.5 billion in cash and $1.5 billion in remaining share repurchases provides a floor for the stock, although we see limited upside as we anticipate a 20% operating margin may not be reached until mid-2020 year 2025 is in question. We expect new products to be launched as part of RH Contemporary. “Offering the line at more affordable prices will boost demand in the second half of the year, but not enough to push past the mid-point of the forecast,” warned Jefferies analyst Jonathan Matuszewski in a research note.

RH’s difficulties stem in part from Friedman’s poor execution, but also from the reality of changing real estate markets. The momentum has stunned everyone from high-end furniture seller in RH last year, to appliance maker Whirlpool, to home improvement sellers Home Depot and Lowe’s.

According to the National Association of Realtors, April sales of existing homes fell 3.4% from a year earlier. House prices fell for the third straight month.

A new Redfin report this week found that nationwide home prices in April recorded their sharpest decline in more than a decade, falling $18,000. According to the report, average house prices fell in 45 out of more than 90 metro markets.

“We start it [our new product line] into perhaps the worst upscale home environment I’ve ever seen in my career. “I’ve never seen luxury real estate down as much as we’ve seen in recent reports and we have the highest interest rates in 20 years,” Friedman added on the conference call.

The stage is set for a similar tone from Friedman in three months.

Brian Sozzi is Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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Russell Falcon

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