Is RH About to Get Hit by President Trump's Tariffs?

Key Points

• RH has rearranged its supply chain to adapt to existing tariffs.

• An additional 50% duty on imports of kitchen and bathroom furnishings, as well as 30% tariffs on upholstered furniture tariff will complicate its business further.

• CEO Gary Friedman thinks it will be harder for his competitors to deal with.

• 10 stocks we like better than RH ›

RH (NYSE: RH), the company formerly known as Restoration Hardware, is no stranger to the trade war, but things might be set to go from bad to worse.

President Donald Trump just announced a new round of tariffs set to go in effect on Oct. 1, saying he would impose import taxes on furniture, among other categories. There will be a 30% tariff on imported upholstered furniture, and a 50% tariff on imported kitchen cabinets, bathroom vanities, and related products. It's clear if that is in addition to already existing tariffs, as Trump announced the tariffs in a series of posts on Truth Social.

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RH stock sold off on the news, trading down 3.3% on Friday afternoon. The home furnishing stock has long been volatile as its business model has the potential to yield high profit margins, but the company is sensitive to the macroeconomic environment, and the stock is down sharply from its peak due in part to challenges related to the weak housing market and a pullback in discretionary spending.

Image source: RH.

How RH has handled tariffs so far

Like most furniture sellers in the U.S., RH imports most of its product from abroad. In its last fiscal year, the company said 72% of its total dollar volume from its purchases came from Asia, including 35% from Vietnam, 23% from China, and the remainder from Indonesia and India.

After Asia, 18% comes from North America, including 10% from the U.S., with the remaining 10% from Europe and the rest of the world. Some of RH's products are produced at a manufacturing facility in North Carolina. Additionally, the company has begun expanding in Europe, so not all of the products it imports are coming to the U.S.

According to research from The Motley Fool, the tariff rate on imports from Vietnam as of Aug. 7 was 20%, while tariffs on China are now 55%. RH has already responded to existing tariffs, moving production out of China as it said receipts from China would fall from 16% in the first quarter to 2% in the fourth quarter.

RH CEO Gary Friedman has been open about his feelings on tariffs and the company's strategy. In the second-quarter earnings call earlier in September, Friedman said tariffs would shift about 5% of orders from the second quarter to the third quarter. Friedman also argued that it was unrealistic to reshore furniture manufacturing in the U.S., saying that it would take years to build the infrastructure to do so, and that manufacturing for high-quality wood and metal furniture does not exist at scale in the U.S.

To adjust to existing tariffs, the company has moved a significant portion of its upholstered furniture manufacturing to North Carolina, and it expects to produce 52% of its furniture in the U.S. this year.

What do the new Trump tariffs mean for RH?

Friedman warned that another round of tariffs could be catastrophic for the industry. However, he thought it would be worse for RH's competitors that don't have the wherewithal to withstand higher import taxes, saying, "I don't want to win because 50% of our competitors, who are really good, hardworking people, get wiped out."

RH is likely to do what it's already done to absorb the new tariffs, and what many companies have done. It will rearrange its supply chain, moving sourcing out of high-cost countries. It will bring more manufacturing back to the U.S. if it can, and it will continue talking about the risks and the constraints of tariffs on its industry.

Thus far, RH has handled the challenges. In fact, in an environment that also includes a weak housing market, RH has managed to deliver steady growth with revenue up 8.4% to $899.2 million and its adjusted operating margin widening by 340 basis points.

That should bode well for its future no matter what tariffs bring. Additionally, the company should benefit from falling interest rates now that the Fed has started cutting them.

Investors should expect RH's volatility to continue, especially with higher tariffs in effect, but it has the ability to manage through those challenges and continue to grow.

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Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.