The Things CEOs Say

When CEOs expound on the state of the global economy on an earnings call, they tend to offer bland views that reflect the consensus. Sometimes, they cite specific macro forces to explain underperformance in their business.

Not Gary Friedman, the chief executive and chairman of RH, the luxury home-furnishings retailer formerly known as Restoration Hardware. Last night, he brought the CEO macro discussion to a whole other level.

In discussing his company’s fourth-quarter results, Friedman riffed on any investor's wall of worries: the Russian invasion of Ukraine, inflation, rising interest rates, supply-chain snags, housing, missteps by the Federal Reserve, and the possibility for a recession.

At one point, he even likened the current situation to a Bear Stearns moment. Tellingly, he cautioned three times during the call that he didn’t want to “scare” people.

The RH conference call is “the talk of the finance world today,”  wrote Joe Weisenthal of Bloomberg, and while that seems like an exaggeration, it certainly lit up financial Twitter today.

Here’s how Friedman started to explain the outlook for RH, according to a Sentieo transcript:

While we enter 2022 with confidence that our efforts will continue to elevate and expand the RH brand for years to come, we also recognize there are several external factors such as record inflation, rising interest rates, and global unrest, that create uncertainty. Although we lack the ability to predict the economic outcomes on a macro scale, we do have the business model, strategy, and balance sheet to take advantage of opportunities that may present themselves, whether it be times of economic expansion, contraction, or dislocation.

While first-quarter sales and margin trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed.

The CEO said that the invasion of Ukraine was “a kind of a reckoning point, if you will, where people had to stop and pay attention to everything,” adding  that “we saw our business slow about 10 to 12 points, and it's been relatively consistent during that period.”

Pressed further on the thinking behind his guidance, Friedman said:

 Well, look, I mean, it's probably one of the most difficult guides since 2008 and '09 because we're right in the middle of this disruption from Ukraine and Russia, which I think -- I don't think it's all Ukraine and Russia. I think it's triggered a greater awareness. Like it's like someone -- I think this was, ring the bell, everybody pay attention. And then all of a sudden, everybody started talking. Yes, all of a sudden, the Fed's off to the races, and that creates concern. You've got housing prices at all-time highs. I mean, is it sustainable? I don't know for how long the math. Yes, doesn't make sense on kind of what's happening in the housing sector and other places that -- you've got inflation like I've never seen.

... I don't think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. It's -- and I think it's going to outrun the consumer. And I think we're going to be in some tricky space… 

And I just don't think it's like -- again, I don't want to scare everybody.  But I talked about the theme, like there's this scene in The Big Short where everybody is in that ballroom and the guy -- I think it's the guy from Bear Stearns or someone is up there, one of those things, and he's saying how they're going to buy back $1 billion of their stock, this, this and that.  And then one guy who's on his BlackBerry, he goes, "Can I ask a question, sir? In the 20 minutes that you've been talking, your stock is down like 55%." And everybody ran out of the room.

 I just think we tend to just try to be transparent and honest. And look, maybe our stock is going to take a big hit because of this, and people are going to think Gary Friedman wasn't excited. I've never -- I told my team, I've never been -- in my 22 years here, I've never been more excited. I've also never been more uncertain, right? So -- and I think you have to take a real balanced view right now.

Those comments may be getting more attention than RH’s quarterly results – which were mixed, according to Teresa Rivas of Barron's – and its plans for a 3-for-1 stock split. The retailer earned an adjusted $5.66 per share, higher than expected. But its 11% gain in revenue from a year ago fell short of estimates. The stock tumbled 13.3% today, to $334.28,

In their research notes, Wall Street analysts focused on RH’s performance and revenue guidance. Those who mentioned the macro comments on the call were circumspect in doing so. “Chief Executive Officer Gary Friedman, while expressing as much confidence as ever regarding RH’s long-term growth potential, simultaneously sounded quite cautious regarding the near-term macro environment,” wrote analysts at William Blair.  The call was “sober in tone,” according to Bank of America. Sober indeed.