Bad Omen For Home Furnishings As Berkshire Hathaway Dumps Its RH Stock

Warren Buffet just cast a vote of no confidence in RH
RH
ahead of Gary Friedman’s upcoming first quarter 2023 earnings report. Earlier this week, Berkshire Hathaway
BRK.B
sold all 2.36 million shares it held in RH, according to a 13F filing.

Buffet began acquiring RH stock in the third quarter 2019, when it was trading for under $200. Riding the pandemic boom that saw home furnishings sales skyrocket, its value peaked in August 2021 at around $770, but then started to fall, ending 2022 at $267. It is now trading just under $260.

While TD Cowen remains cautiously optimistic about RH’s prospects when it opens Europe later this year and the new RH Contemporary product line catches hold, it believes RH’s strategy to continue to move up-market is solid.

However, analyst Max Rahlenko added, “We view Berkshire Hathaway’s recent liquidation of shares as a negative for the long-term narrative.”

Friedman’s been crystal clear on that narrative: to position RH “as the first fully integrated luxury home brand in the world,” by offering more services and elevating prices and design to attract the most discerning affluent customers.

Buffett apparently believes that RH hasn’t found the key to unlock that door.

The Best Data Wins

“Buffett has his finger on the home/shelter categories unlike any other. Imagine the data to which he is privy,” observed Chris Ramey, founder of the Home Trust International.

Buffett’s visibility extends across many categories that impact sales of home furnishing products and services. For example, Berkshire Hathaway’s HomeServices of America company gives it a ground-floor view of what’s happening in the housing market, most especially at the upper end, through its real estate brokerage network and integrated real estate services spanning brokerage, mortgage, insurance, title and escrow.

Friedman has repeatedly acknowledged that RH’s prospects are tied directly to the housing and refinancing markets. Both of which are under pressure with rising interest rates and an evolving banking crisis. Coincident with Berkshire Hathaway’s sell-off of RH stock, it also exited its U.S. Bancorp
TBBK
and Bank of New York Mellon
BK
holdings.

In addition, Buffett has bandwidth across other categories that reflect consumers’ plans for home improvements, which track home furnishings sales. Berkshire Hathaway owns the Benjamin Moore & Co paint company and Shaw Industries in carpet and flooring. It also has significant holdings in Floor & Decor, the category killer in hard-surface flooring.

And more specifically, its Nebraska Furniture Market, Jordan’s Furniture, Star Furniture and the picture framing company Larson Juhl give Buffett insight into purchasing trends in categories directly competitive with RH.

Canary In The Coal Mine

While Friedman is open about the headwinds RH faces – “The data points to business in our sector likely getting worse before it gets better,” he wrote in his year-end 2022 letter – Buffett seems to have an even longer-term view.

“Buffett’s investments reflect a broader perspective. His decision to pull out of RH reflects softness in the home category and concerns about a reported ‘Richcession,’” Ramey noted. “It’s less about RH than the entire home products and services industry.”

RH is the canary in the coal mine of what’s ahead in the home furnishings retail market. It ended fiscal 2022 down 4.4%, falling from $3.8 billion in 2021 to $3.6 billion. And fourth quarter was down 17% from $902 million to $772 million in 2022.

It’s up against even stronger comparables in the coming first quarter which brought in $957 million last year. As its current outlook stands, RH is guiding on first quarter 2023 revenues in the $720 to $735 million range and year-end between $2.9 to $3.1 billion, a precipitous drop from 2021.

Nonetheless, Friedman remains on course. “We’re not panicked. We’re not nervous. We had the best model going into the pandemic. We have the best model coming out of the pandemic. And we will leapfrog even farther ahead when we get to ‘24 and ‘25,” he said in the most recent earnings call.

Buffett apparently disagrees, and that should put everyone in the home furnishings market on notice.

“RH’s Friedman is a savvy visionary category leader, which in this case means he takes the first hit,” Ramey concluded. “Ultimately, the firms behind RH should be most concerned. Buffet’s decision to pull out of RH is a negative omen for anyone in home.”