California-based home furnishings company RH (NYSE:RH), formerly Restoration Hardware, indirectly rang the alarm over potential concerns bubbling in the U.S. housing market in its recent earnings call. Indeed, RH stock is down a brutal 14% today after issuing weak earnings and guidance stemming from housing market-related headwinds.
According to RH, the housing market is “frozen.”
“With 82% of homeowners having mortgages below 5%, and 62% below 4%, we continue to expect the existing housing market to remain frozen until interest rates and/or home prices fall meaningfully. Additionally, the home furnishings market has become increasingly promotional, and we believe that will create a mix shift towards clearance products, pressuring gross margins.”
RH is essentially suffering from slowed turnover in the real estate space. Many homeowners are enjoying pandemic-era interest rates, while hopeful homebuyers are priced out of the market with mortgage rates as high as 8%. As such, the company has been pinched by a lack of demand for homes and, thus, home furnishings.
RH Stock Sinks on Weakening Housing Market
RH recorded a surprising quarterly loss of 12 cents a share in its fiscal third quarter, a whopping 138% miss. This marked the first earnings miss for the company in seven quarters. The slowdown has prompted RH to push back the release of its new catalog until the first quarter of 2024.
That isn’t to say all hope is lost, however. RH remains hopeful that the Federal Reserve will cut interest rates soon, hopefully bringing mortgage rates down enough to restore some lost demand.
According to the company, should rates ease back down then “RH has juice (with caviar).”
Reasonably so, interest rate traders are currently pricing in a nearly 50% chance of a rate cut by March of next year, per the CME FedWatch Tool. Indeed, many analysts assume the promising recent inflation reports will push the central bank towards rate cuts to stabilize the economy, with prices heading towards Fed-acceptable levels.
In an admittedly quirky letter to shareholders, RH remained hopeful of the company’s future prospects.
“For the past 23 years we’ve heard others tell us what can’t be done, and for the past 23 years we’ve failed… to listen,” the letter read. “Soon the world will be within our reach.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
