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What happened

RH (NYSE: RH), the company behind furniture retailer Restoration Hardware, delivered in the second quarter. But the company warned higher mortgage rates and other macroeconomic pressures are likely to weigh on the luxury housing market in the quarters to come. Investors are taking the warning seriously, sending shares of RH down as much as 12% in Friday trading.

So what

RH has long sought out a luxury niche in the furniture market, and the company continues to see significant demand for its offerings despite economic concerns. RH earned $3.93 per share in the second quarter on revenue of $800 million, topping analyst expectations for $2.56 per share in earnings on sales of $784.9 million.

Revenue was down from $992 million in the same three months a year prior, and operating margin in the quarter fell to 18.9% compared to 23.6% in the second quarter of 2022. But investors had expected some pressure on the business.

RH sees no quick rebound in the market. The company in its letter to shareholders said, “We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook is for rates to remain unchanged until the second quarter of 2024.”

As a result, RH said it expects to generate between $740 million and $760 million in sales in the current quarter. That’s below Wall Street’s $772 million consensus estimate.

Now what

RH has the wherewithal to manage through the economic headwinds and is making the most of the declines in its share price. The company repurchased 3.7 million shares in the second quarter and has now reduced its share count by more than 22% in the past year.

Long term, RH still believes it can grow its business to between $5 billion and $6 billion in annual sales in North America alone and upward of $25 billion globally. It intends to do so by adding luxury showrooms all over the world similar to its recently opened United Kingdom gallery located in Cotswolds, a posh area located nearly two hours west of London.

RH has a proven formula, and it has been dangerous to bet against management over the long run, but there isn’t much the company can do in the near term if the economy remains shaky. Investors for now appear content to watch this story develop from the sidelines.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

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