RH Plans to Move Production From China to US and Italy

News Analysis

To mitigate the cost of tariffs, RH plans to shift most of its production operations from China to the United States and Italy.

The U.S. luxury home furnishing retailer, formerly known as Restoration Hardware, reported higher revenue for the first fiscal quarter of 2025 on June 12, despite multiple challenges, including rising costs driven by tariffs.

In a letter to stockholders, chairman and CEO Gary Friedman said the company’s net sales for the quarter that ended on May 3 increased by 12 percent year-over-year to $814 million.

Wall Street cheered the results, sending the company’s shares up by nearly 7 percent to close at $189.12 on June 13, despite a sharp decline in the broader market.

That’s a strong contrast to the previous earnings report in April, when the company’s shares plunged by 39.64 percent despite a more significant 18 percent increase in fourth-quarter sales for fiscal 2024.

Back then, Wall Street was concerned about the demand and supply challenges RH was facing.

On the demand side, the company was contending with a weak housing market—the worst in 50 years, as Friedman describes it in his letter—and subdued consumer sentiment, which typically leads to lower spending on luxury items such as furniture.

Meanwhile, elevated inflation at the time—which squeezed consumer budgets—added to the downward pressure on luxury spending.

On the supply side, the company faced the prospect of higher production costs because of tariffs and growing competition, which made it harder to pass those costs on to consumers.

While these challenges persist, management has reassured Wall Street that the luxury furniture company is well-positioned to address them, thanks to the substantial investments it has made in recent years to enhance and expand its product offerings and platform.

These investments have led to significant market-share gains and strategic separation, boding well for the company’s continued growth over the next decade at home and abroad.

“We continue to be pleased with the second-year demand trends at RH England, with the Gallery up 47 percent in the first quarter and online demand up 44 percent,” Friedman said.

The company expects current demand trends to drive sales at its flagship location in England to between $37 million and $39 million in fiscal year 2025, RH England’s second full fiscal year, with online demand reaching approximately $8 million.

Wall Street closely monitors the company’s revenue growth, as it is a key indicator of demand strength, as well as the ability to scale the business model, gain market share, and achieve a cost advantage over competitors.

Meanwhile, the company is preparing to mitigate tariff costs by shifting production from China to the United States and Italy.

“We are now projecting that 52% of our upholstered furniture will be produced in the United States and 21% will be produced in Italy by the end of 2025,” Friedman said during the company’s earnings conference call.

“While there remains uncertainty until the reciprocal tariff negotiations are complete, we have proven we are well-positioned to compete favorably in any market conditions.”

In addition, the company is delaying the launch of its “new concept”—a new store format planned for the second half of 2025—to the spring of 2026, when there will be more certainty regarding tariffs and the product price.

At the same time, it plans to increase membership discounts to 30 percent from 25 percent.

Still, Wall Street has a couple of concerns about the company’s plans to address multiple challenges.

One of the company’s key challenges is its low and volatile profitability. Its net profit margin climbed to 19.62 percent in 2022 from negative 2 percent in 2010, but then dropped to about 2 percent over the past two years.

Another concern is the company’s low return on its investments, which fails to match the cost of capital to finance it.

According to Gurufocus.com, RH’s return on invested capital, a measure of the profit a company earns on the capital invested in it, is currently 7.23 percent, lagging behind the weighted average cost of capital, which is presently 12.52 percent.

Companies whose returns on investment fall short of the cost of financing them undermine value rather than create it for capital holders.