Is It Too Optimistic of RH to Maintain Margin Outlook Despite Tariffs?

The ambiguity surrounding the United States’ new tariff regime is currently known to be haunting the global market, and RH RH is not an exception to it, given its line of business. Being a luxury retailer in the home furnishing space, the company’s business prospects directly align with the housing market trends, which are currently witnessing a setback in the United States due to homebuyers facing affordability challenges.

However, RH is not sitting idle amid the ongoing uncertainties. It is undergoing active investments across diversified business plans to boost its revenue visibility and ensure margin expansion in the long term. To minimize the prospective adverse impacts of the new tariff regime, RH is focusing on shifting its sourcing out of China with the expectation of receipts reducing from 16% in the first quarter of fiscal 2025 to 2% in the fourth quarter of the same year. By the end of 2025, it projects that 52% of its upholstered furniture will be produced in the United States and 21% in Italy, thus reducing the supply-chain risks and increasing margin growth.

Besides, with the domestic market being dicey, RH is shifting its focus to cash out of the international markets, especially Europe. With the upcoming September 2025 RH Paris gallery opening, alongside another two openings in London and Milan in 2026, it expects to continue this stance to reduce revenue and profitability risks.

During the first quarter of fiscal 2025, RH’s adjusted operating and EBITDA margins expanded year over year by 50 basis points (bps) to 7% and 80 bps to 13.1%, respectively. Given the leverage prospects from its in-house initiatives, RH maintained its fiscal 2025 adjusted operating and EBITDA margin guidance. It expects adjusted operating margin between 14% and 15% (up from 11.3% reported in fiscal 2024) and adjusted EBITDA margin between 20% and 21% (up from 16.9% reported last year).

RH Stock’s Price Performance vs. Other Market Players

Shares of this California-based luxury retailer in the home furnishing space have gained 16.4% in the past three months, outperforming the Hoya Capital Housing ETF (HOMZ) index. HOMZ is an exchange-traded fund that offers a diversified glimpse of the U.S. residential housing industry through 100 companies across homebuilding, rental operators, home improvement, furnishings, mortgage services and real estate tech, to name a few.

Sharing market space with RH, other renowned players, including Ethan Allen Interiors Inc. ETD and Arhaus, Inc. ARHS, offer substantial competition in the home furnishings space. During the past three months, the share price performance of Ethan Allen and Arhaus has gained 7.6% and 2.5%, respectively.

RH’s Valuation Trend

RH stock is currently trading at a forward 12-month price-to-sales (P/S) ratio of 0.95. This is compared with the forward 12-month P/S ratios of 1.19X and 0.83X, respectively, at which Ethan Allen and Arhaus are currently trading. The discounted valuation of the stock compared with one of the mentioned renowned market players looks promising for investors.

Earnings Estimate Revision of RH

RH’s earnings estimates for fiscal 2025 and 2026 have trended downward in the past 30 days to $10.76 per share and $14.61, respectively. However, the revised estimated figures for fiscal 2025 and 2026 reflect year-over-year growth of 99.6% and 35.8%, respectively.

EPS Trend

The current uncertainties in the housing market and global unrest have induced bearish sentiments among analysts. However, the favorable year-over-year comparisons indicate that despite external risks, RH will be able to capitalize on its in-house business strategies and ensure incremental prospects.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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