This Luxury CEO Just Said "Big Inflation" Is Coming Because of Trump Tariffs and Half His Industry Could Get "Wiped Out." But Could the Turmoil Be an Investment Opportunity?

Key Points

• RH's earnings report and outlook were affected by this year's new tariffs.

• But if that weren't bad enough, the Administration is now investigating tariffs specifically on furniture.

• RH's CEO said this would lead to huge inflation, and half the industry potentially going bankrupt.

• 10 stocks we like better than RH ›

Never one to mince words, RH (NYSE: RH) CEO Gary Friedman laid out a dire scenario for the furniture industry on the company's earnings call last week. The CEO also had particularly strong words for the Trump Administration.

Already having missed revenue and earnings estimates because of baseline and "reciprocal" tariffs implemented by the Trump Administration this year, there is now also the prospect of new furniture-specific tariffs on the horizon.

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RH's results and outlook reflected the existing tariff headwinds, while Friedman laid out how things could go from bad to worse... but also how RH could ultimately benefit from the industry turmoil.

How tariffs affected RH's results and outlook

In its second fiscal quarter, RH's revenue grew 8.4% to $899.2 million, with adjusted (non-GAAP) earnings per share of $2.93, up 73.4%. Despite the growth figures, both top and bottom lines came in below expectations. And remember, last year's numbers reflected extremely low revenue and earnings compared with RH's 2021 peak. The housing market, according to Friedman, has been, "the worst in 50 years, for three straight years."

Not only is demand lackluster, but furniture makers are now having to deal with tariffs, which have already affected RH's year-to-date results, and will also affect its second-half outlook.

Because of tariffs, RH delayed its new brand extension from 2025 to Spring 2026, and also delayed sending its fall collection source book by eight weeks. Moreover, the company lowered its operating margin outlook for the year because of a combination of tariff impacts and startup costs related to its European expansion. But the European expansion may also have been the result of tariffs; since those European revenues won't be exposed to them, RH is likely looking to expand elsewhere outside America, rather than investing in America -- which is ironic in light of the tariff's goals.

And things could be about to get worse

Meanwhile, in a surprise to many, President Trump announced on August 25 the Administration had launched an investigation into the furniture industry, with a new furniture-specific tariff coming within 50 days. President Trump justified the new tariffs by saying they would help bring furniture manufacturing back to North Carolina, South Carolina, Michigan, and other states. Besides High Point, North Carolina, there is also a major furniture hub in Las Vegas, Nevada -- another swing state.

Needless to say, Friedman wasn't so pleased by the new announcement, warning the tariffs would cause the dual threats of big furniture inflation while perhaps wiping out 50% of the industry. In his usual colorful tone, he said:

God forbid, they through another tariff on furniture. I mean I think they've got it, but someone has got to come talk to us, talk to me, call me. I run the biggest luxury home brand in the world, somebody call me and ask me what I think. Because it's not really us. I worry about -- I don't want to win because 50% of our competitors who are really good, hard-working people get wiped out... I really don't think anybody is thinking about the math. There's no one that's making wood furniture scale, metal furniture scale. If there is another round of tariffs and furniture. I mean, long term, it will be good for us -- it's really bad for a lot of people in High Point. So whoever in High Point or North Carolina is advocating for it is got to have a really narrow myopic view because this makes no sense for the U.S. economy long term. We will blow up people, and there will be massive job losses. And I think people need to understand that at all levels of the administration.

Friedman does note that while upholstered furniture can be made in the U.S., wood and metal furniture are likely not coming back. Or at least it would be exceedingly difficult to onshore that type of furniture production because of the large capital requirements and workforce training and willingness issues involved.

Image source: Getty Images.

Why RH could be a long-term winner in a tariff scenario

Yet on the other hand, Friedman did say, "long-term it will be good for us." Why?

That's because RH is, "the biggest luxury home brand in the world," according to Friedman, giving the company certain advantages over smaller-scale would-be competitors. These advantages include bargaining power with suppliers, and the capital capacity to invest in expensive U.S. production, if it does come to that.

So, if furniture-specific tariffs do come out and everyone has to raise prices or invest in new furniture manufacturing, a lot of RH's smaller competitors could fall by the wayside. And if competition falls off the wayside, that paves the way potentially for consolidation, with RH taking more market share.

RH still has risks

For those looking to play this potential dynamic, investors should probably be patient. One would have to have the tariffs announced, then implemented, then for smaller competitors to bow out. Meanwhile, RH remains somewhat risky, as management mistakenly loaded up on debt to fund aggressive share repurchases in 2022 and 2023.

So while the RH turnaround could actually be a big one if the industry consolidates after these tariffs, investors are better off taking a wait-and-see approach to make sure RH itself survives, without too much further damage to its balance sheet.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.