Date: Monday, April 4, 2022
Some quarterly calls by public companies are basically worthless, featuring analysts lobbing softball questions to CEOs who cherry-pick facts to pump their own stock.
And then there was Tuesday afternoon’s call hosted by Gary Friedman, CEO of luxury home furnishings brand RH (NYSE: RH), formerly known as Restoration Hardware.
Friedman — with what one analyst called “brutal honesty” — expounded upon supply chain woes, surging ocean freight rates, soaring inflation and a sudden plunge in consumer demand coinciding with Russia’s invasion of Ukraine.
“I’m just going to tell the truth,” he said. “Maybe our stock is going to take a big hit because of this.” He was right. His company’s market value fell by $1 billion on Wednesday.
Supply chain still ‘chaotic’
“Everybody thinks supply chains are getting better. I don’t think they’ve gotten better at all,” Friedman said.
“Product is on the water for a long time, getting ships into port. We’ve got about five extra weeks in our supply chain right now. That’s a lot of time, a lot of money. And that’s the average. Some stuff’s coming on time and some is 10-12 weeks behind.
“Many of us thought we’d have been caught up by now. We’ll be lucky to be caught up by the end of the year,” he said, pointing to heavy omicron impacts on supply chains in China, Vietnam and other sourcing countries.
“It’s hitting everybody from all angles. You just have this compounding supply chain kind of puzzle happening.
“I’ve never seen it so chaotic, honestly, from a [project] execution point of view, whether it’s construction, sourcing, manufacturing, shifting supply chains or freight. Everything is a little out of sync in the world right now.”
On freight pricing, Friedman pointed out that most U.S. importers have already signed annual trans-Pacific contracts for 2022. “I wonder if anybody at the Fed has picked up the phone and called a businessperson and said, ‘Hey, what do you think is happening with inflation? How are ocean rates?”
He disclosed that after the initial supply chain disruption in 2020, RH’s average freight rate doubled from $2,400 to $4,800 per forty-foot equivalent unit. “I’m not going to tell you what it just went to. But let’s just say that [earlier doubling] looks like a nice increase [in comparison]. And it’s not just us. It’s everybody.”
Demand sank when war broke out
The biggest revelation on the RH call was Friedman’s disclosure on demand. He revealed that the company saw a 10-12% drop in demand “overnight” coinciding with Russia’s invasion of Ukraine — and no recovery since then.
“Other people might be banging a brighter, happier drum than me. Do they have better numbers than we do? I don’t think so.”
He noted that most other U.S. retailers reported earlier than RH and had focused disclosures on Q1 sales, not current demand. RH’s Q1 sales will be strong too, he pointed out, courtesy of the backlog built up before the drop. “I think we’re the first ones talking about demand,” he said.
“The invasion of Ukraine by Russia just became kind of a reckoning point. People had to stop and pay attention to everything. And I don’t think it’s all about Ukraine and Russia. I think it triggered a greater awareness. It was like: Ring the bell, everybody pay attention” — not just to the war itself, but to the prewar surge in inflation, the Fed’s decision to hike interest rates, overheating in real estate and other concerns.
“I don’t want to scare everybody,” he said.
He proceeded to say something scary, likening the recent shift in conditions to the scene in the financial-crisis movie “The Big Short” when a conference panelist was told, “From the time you guys started talking, Bear Stearns’ stock has fallen by more than 38%,” and attendees frantically checked their Blackberrys and scrambled from the room even though Alan Greenspan was the next scheduled speaker.
Supply chain fallout on timing
“Everything is kind of happening at once,” said Friedman, who cited consequences for both retail sales timing and product pricing.
Asked by an analyst whether supply chain issues would affect the launch of RH’s Contemporary-branded collection, Friedman laughed and responded: “What do you think? Of course.”
That catalog was supposed to go out in March. It will go out in May instead because “we want to have some goods in stock,” he said. The catalog will be cut from 450-500 pages to 300-350 pages because “stuff is late and my sense is it might even be later.”
Fallout for pricing
He also confirmed that RH will be passing along its higher costs to consumers.
“When you have this kind of impact from freight and raw materials and price increases from suppliers and so on, you can say, ‘Oh, we’re big. We can absorb it.’ But that’s kind of BS. What’s happening in the world today is prices are going up everywhere. If they’re not, earnings are going to go down.
“The question people have to ask is: ‘Do I want to be a bigger, lower-margin business and chase sales? Or do I want to be a smaller, higher-margin business and come out of this really positioned for the long term?’ And that [higher-margin option] is the view we’ve taken.”
The “Big Short”-esque risk ahead is that higher costs (including container shipping freight) are passed along to consumers, the war stokes even higher inflation as it simultaneously curbs sentiment, the Fed proceeds with an extended run of rate hikes, and goods buying suffers for an extended period.