Analyst Note| Jaime M. Katz, CFA |
We previously believed that RH’s no-moat position had been improving, as we thought efforts to reach into the luxury landscape would elevate the profit and return profile. We believe such efforts have largely been realized, which should lead to more consistent operating margins ahead. As such, we have reset our trend outlook to stable from positive as we believe the brand has healthy recognition in the niche demographic cohort it caters to (high income, luxury clientele) that should prove unwavering. The firm is proving that it can operate in different verticals to promote its brand, including both retailing and hospitality, with ventures into homebuilding and guesthouses ahead, supporting existing awareness. Moreover, while the expansion into guesthouses, private jets, and yachts could be margin accretive, that aspect of the business is too new and not substantial enough to add materially to the firm’s competitive edge yet.