Will RH become the "meme stock" of 2025?

Published: 2025-06-13 05:23:19 ET RH

Published on 06/13/2025 at 05:23

By Kevin Smith

The American chain of luxury furniture stores is likely to continue to spark speculative frenzies in the coming quarters.

Rarely has a business been managed so precariously. The group has been struggling with colossal debt since its whimsical CEO, Gary Friedman, took advantage of the financial frenzy during the pandemic to raise $2.2bn in new debt and then use it to buy back its own shares en masse.

The problem is that these share buybacks, while reducing the number of shares in circulation by a third in the space of a few months—unprecedented in analysts' memory—were also carried out at prices twice as high as those at the time. As things stand, the destruction of value therefore appears substantial and possibly irreversible.

The context has changed: the crazy prices seen during the pandemic are now a thing of the past; moreover, the real estate market has contracted—Friedman recently described it as "the worst real estate market in 50 years"—and customs duties have further eroded margins already weakened by galloping operating cost inflation.

Fortunately for its supporters, if there are any left after a dramatic decline in commercial performance over the past two years, the group's quarterly results published yesterday seem to indicate the beginning of stabilization.

However, there is little cause for enthusiasm: while sales are up 12%, the increase in costs is eating into all of these gains, while the entire operating profit is being consumed by interest expenses. The financial leverage remains a concern, with $4bn in net debt against negative equity and annual operating profit of less than $400m over the last two fiscal years.

As usual, extreme caution will be exercised with communications focused on "adjusted" EBITDA : in RH's case, this does not take into account the cost of debt, stock option compensation (the relevance of which is questionable), or very real expenses such as restructuring costs and investments in the group's IT infrastructure.

The case of RH is a good illustration of what happens when you live beyond your means. Over the last decade, the group has spent a total of $3.4bn on share buybacks, while generating cumulative free cash flow of only $1.4bn. The balance, as we have seen, was financed by an increase in debt, which now leaves it in an extremely vulnerable position. See on this subject Reality catches up with RH after unprecedented speculative euphoria.

Like the inimitable GameStop, or in an even more caricatural vein, MicroStrategy, RH's financial engineering relies more on the credulity—some would say astonishing naivety—of investors than on the merits of its business model. See GameStop Corp.: The king of "meme stocks" and MicroStrategy Incorporated: History is repeating itself.

While the system is potentially unsustainable, as we said in the introduction, it should nevertheless continue to fuel speculative fervor—whether upward or downward.

Kevin Smith