RH Is Opening Larger Outlet Stores In Big Box Real Estate: Does It Mark A Change In The Company's Business Model Or Just A Case of Real Estate Opportunism?

RH, which operates upscale "architecturally-inspired" galleries, is also rapidly expanding a network of outlet stores in "2nd generation" real estate vacated by Big Box tenants

Furniture and home furnishings retailer RH RH 0.00%↑ may be best known for its more than 80 “architecturally-inspired” galleries.

RH galleries are some of the most unique environments in physical retail.

They are located in prominent, upscale locations and are designed to both elevate, highlight and promote the RH product assortment and provide memorable experiences for customers.

But at the same time RH has been opening glamorous galleries it has been aggressively expanding a lower profile network of retail stores:

The nearly four dozen RH Outlet stores that it operates, mostly in “2nd generation” Big Box retail real estate in suburban shopping centers.

RH has opened more than a dozen outlet stores over the past 6 years.

Which also happens to be the same period when many Big Box retailers filed for bankruptcy and/or closed thousands of stores.

And RH has been a frequent taker of this real estate:

More than 1/4 of RH Outlet stores are located in repurposed buildings that were formerly home to bankrupt retailers Toys R Us, Bed Bath & Beyond, Big Lots and Bob’s Stores.

RH notes that its outlet stores are a key part of its reverse logistics platform that enable it to efficiently collect and re-sell returned merchandise as well as to clear out discontinued, floor model and overstock inventory.

While RH Outlet stores can be as small as 15,000 square feet, most are in the range of 20,000 - 30,000 square feet.

Like the RH Outlet in Northbrook, IL that opened last month in a ~30,000 square foot former Best Buy.

But a recently opened RH Outlet — the Rockville, MD store that opened in December 2024 — is 61,000 square feet, or 2-3x the size of its average outlet store.

And two RH Outlet stores are opening this week: one in a former Big Lots in San Jose, CA and another in part of a vacated Target store in Commack, NY that is >40,000 square feet.

So RH is clearly opening more — and larger — outlet stores.

But is it because RH needs to unload more of its product through discount channels, either because of weakening demand at its galleries or offering the wrong products?

Or is RH simply being opportunistic by snapping up real estate that may only be available due to retailer bankruptcies?

Of course the simplest answer could also apply:

Maybe RH is growing the square footage of its outlet store network simply to keep pace with an increased rate of gallery expansion.

RH does plan to open 9 galleries in 2025.

And its largest gallery to-date, a ~100,000 square foot property in Newport Beach, CA, just recently opened at the end of 2024.

RH may need more outlet store square footage because more (and larger) galleries are funneling additional products through its reverse logistics platform.

So more product volume may be flowing through the RH network but not at a higher proportion of its sales.

Plus the larger, 2nd generational Big Box real estate that RH is occupying for outlet stores may be among the few available spaces on the market.

And the quickest and most cost effective way for RH to open outlet stores while it also adds new galleries.

In other words, the rapid expansion of the RH Outlet network — and the Company’s opening of more and larger outlet stores — may not portend negatively for customer demand or the RH product offering.

It could instead be a natural response by a fast growing retailer that needs more space and is utilizing the real estate that happens to be available.