Why Gary Friedman’s RH Second Quarter Earnings Call Is A Must-Listen For Every Retailer

By Pamela N. Danziger, Contributor
RH Dallas Gallery Courtesy of RH

Quarter-after-quarter RH RH keeps delivering incredible results. It could almost get boring, but it never is.

Gary Friedman’s earnings call should be required listening for every leader or aspiring leader in retail today, not so much to learn about RH but to sit at the feet of an inspiring, retail visionary. More than a brand, more than a retailer, Friedman describes the company he’s built as an “ecosystem of products, services, places and spaces.”

As for the news, RH ended its second quarter 2021 with revenues of $989 million, up 39% over same period last year and up 40% over 2019. Through the first half of 2021, revenues reached $1.9 billion, up 42% from the same period in 2019.

The company’s income performance was even more impressive. Net income reached $357 million in the first six-months of the year, as compared with $100 million in same period 2019. It is also sitting on a pile of cash, with $95 million in free cash flow added in the quarter to total $231 million through the first half of the year.

This led RH to adjust its fiscal 2021 outlook to grow revenues between 31% to 33%, upping its prior outlook between 25% to 30%. And it projects adjusted operating margin in the range of 24.9% to 25.5%, over previous expectations of 23.5% to 24.3%.

The companies continued strong performance led Cowen’s Max Rahlenko to conclude: “Ultimately, we are impressed with the top-and-bottom line beats given ongoing supply chain and logistics disruptions, as the business is overall operating at peak efficiency with exceptionally strong underlying momentum.”

What’s ahead

Among the latest announcements were plans to introduce an extended range of product collections to further expand RH’s ecosystem well beyond the $170 billion home furnishings market. These include RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, and RH Atelier to be introduced over the next decade.

Friedman envisions a total addressable global market opportunity between $ 7 trillion to $10 trillion, as each element of the RH ecosystem adds to and buttresses the whole.

“A one percent share of the global market represents a $70 to $100 billion opportunity,” he said in a statement. “Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world.”

To play on the much bigger world stage, it will open its first international Design Gallery in the 73-acre Aynhoe Park country estate near Banbury, a little over an hour’s drive from London. The grand RH England gallery will follow with openings of what’s promised as equally breathtaking gallery experiences in Paris and London.

Becoming that world’s “arbiter of taste” will be aided with the launch of RH Media, described as a “content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.”

And to connect consumers with the many facets of the RH ecosystem, a new online portal, called the World of RH, will be launching next year. It will invite customers to partake in the full depth and breadth of the brand and its ecosystem.

“Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world,” his statement conveyed.

Making over its older Legacy Galleries into state-of-art, mammoth-sized Design Galleries will continue, with Chicago, Jacksonville and San Francisco slated to open this fall. All will include hospitality experiences to make them destinations, not just places to buy furniture.

But he also pulled back the originally promised Fall 2021 introduction of RH Contemporary and the opening of the first HR Guesthouse in New York City until spring next year. Further, its Fall Source Book mailing is on hold, all because of uncertainties surrounding the Delta variant and potential sourcing delays it is experiencing in Vietnam.

Friedman closed his prepared remarks outlining his overarching ambition to elevate the RH brand and amplify “our core business by adding new revenue streams while disrupting and redefining multiple industries,” including architecture, interior design and landscape architecture.

“Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive,” he said. “We continue our quest to become one of the most admired brands in the world.”

And with that, he went off-script to answer analysts’ questions and then things got really interesting.

What every retailer can learn

As much as Gary Friedman is an astute businessman, he is equal parts philosopher and psychologist. Steve Jobs-like comes immediately to mind.

Like Jobs, he dropped out of college. His wisdom comes not from books but from life experience, starting with folding clothes in a Santa Rosa Gap store. And like Jobs, he learned from ups and downs in his business life.

But unlike Jobs, who grew up in a stable middle-class home, Friedman said his mother suffered from mental illness throughout her life. As a result, his early home life was unstable. He said they lived on food stamps and were evicted multiple times.

It is easy to see how home would play such a large part in Friedman’s professional career, and likewise stores. They must have seemed like magical places where wonderful things could be bought to fulfill one’s dreams, but they were also places he was largely excluded from.

Friedman’s 64-year life journey has uniquely primed him to make his RH ecosystem vision a reality and why every retailer can take a lesson from him.

Retail is a people-first business

Perhaps the biggest mistake retailers make today is to continue to think that products are its primary business. Products’ relative importance rises in necessity businesses, like grocery, but even there, such retailers depend on a whole lot of discretionary purchases to keep the lights on and doors opened.

The products retailers sell are simply a means to an end for the consumer. That’s why retailers must stay focused on the consumer’s end goal. Even Walmart understands this with its “Save Money. Live Better.” promise. Both are experiential ends customers want.

“First you got to think about how do I create demand [i.e. consumers’ end]. And that’s a big part of the focus. And then, we say how do we fill demand,” he shared.

Friedman instinctively understands how important people’s home life is. And he also understands how difficult it is for them to realize their dreams. Decorating a home is a hard and messy business, too easy and expensive to get wrong. RH sets out to make it easy with products and services to bring each person’s home dreams to life.

Keep learning and act on that learning

Since retail is a people-first business, Friedman surrounds himself with smart, positive, problem-solving people. “I try to listen to the people that are way smarter than I am,” he revealed.

While he is the final decision maker, he listens and learns. “I sit here with 20 people for hours and hours going through categories and trends and every detail in our business. We turn over every rock. We gain alignment and clarity. We tend to just debate everything here,” he shared. He pointed to Eri Chaya, the company president, chief creative and merchandising officer, as someone he depends upon to “keep me out of the ditch.”

The people around his table are those “who see the answer in every problem, versus those who see the problem in every answer.”

And he and his people are always poised for action. “When you’re inventing and innovating, it’s just really stimulating for smart, driven people because they are learning by doing. They are learning by being involved. They are not learning by studying an operational manual.” This action-oriented philosophy is how Jeff Bezos grew Amazon.

And as they learn by doing, Friedman is ready to change course. “I always say we reserve the right to change our minds for better ideas and better thinking.”

Strive for excellence

Despite the primed-for-action culture Friedman has built, he is not hesitant to wait. “You don’t rush quality. You wait for it,” he said as he announced delays in launching the much anticipated and hoped for RH Contemporary and the New York City RH Guesthouse.

Rather than push out newness for the sake of newness, he has chosen to wait till the time feels right. And the time spent waiting is going to result in an even better finish.

“The good news is, we keep making it better. So every season we delay, it gets so much better. So it’s between now and next spring, it’s going to continue to get better,” he shared.

While awaiting the newness that effectively has been delayed for two years due to the pandemic and supply chain issues, Friedman has maintained RH’s focus on bettering the core business and its proven best sellers.

“We focus on doing extraordinary and remarkable work. And when we do that, we usually figure out how to monetize it,” he said. That’s a lesson every retailer can learn: “It’s really hard to monetize ordinary and unremarkable.”

No matter what vertical category you sell to or what demographic your customers fall into, every retail can strive to do better than they did before and that much better than the competition.

As Friedman shares, you have to reach for excellence and not settle for just being good enough.

“We have all got to learn to improvise, adapt and overcome at a whole new level. It’s about building new muscles and getting smarter and solving new kinds of problems, and as human beings growing exponentially,” he said. Exponential company growth will follow.  

Be a leader, not a manager

Throughout his most recent earnings call, and other presentations he’s made, Friedman holds the idea of retail management in low regard. “Managers arrange and organize a status quo,” he said. “We don’t even use the word manager in this company. We’re allergic to that word.”

While a lot of management goes into designing, stocking and operating each node in the RH ecosystem, that isn’t Friedman’s or his team’s focus.

“Rule number one is vision is everything. We say vision leads the leaders. Leaders have to be willing to destroy today’s reality to create tomorrow’s future,” he believes. “We have to be willing to tear down our very best work to do something exponentially greater and more valuable.”

Too much retail today is simply status-quo maintaining. So many formerly great retail brands stopped reaching for and redefining their vision as the times change. They settled into management complacency to maintain the status quo, not reach for the stars. I could make a list and you could too, but one thing is for sure, RH won’t be on it.

“Everybody here is titled a leader, because leadership is about taking people somewhere they have never been, doing something they have never done. And we say leaders have to be comfortable making others uncomfortable because you’re in uncharted waters all the time,” he said.

And to guide himself, his team and his company in those uncharted waters, Friedman asks, “Is it directionally right? Is it strategically right? Is it more right than wrong?”

And when the answer is yes, that’s when they all move in one direction together. “Then we get going because that’s when you learn. That’s where you grow and learn exponentially faster than everybody else.”

Set your clock

My advice to every retailer is to set RH’s next earnings call on your calendar. Sure, you’ll hear about RH’s next milestones, which promise to be ground breaking. “Our business is ripping. Maybe somebody else has 40% two-year growth, not many. I don’t think anybody is going to have the two-year growth that we are going to report in third and fourth quarters,” he promised.

But more importantly, you’ll be able to get inside a great retail visionary’s head, be inspired and bring back some of that vision to your business, no matter how small, to make it bigger, better and more remarkable.

Remember, he started as a college dropout folding clothes on a Gap sales floor, not an MBA in the executive office.

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