This RH quarter was spot on with our expectations – both on the revenue and margin lines. RH reported $8.48 vs the Street at $6.50 and our model of $7.15 – but using a normalized tax rate the company earned $7.21. What we were not expecting was commentary that 3Q-to-date is accelerating off of 2Q levels. Clearly, demand in this segment of the market is far from cooling. Numbers over a TREND duration are definitely headed higher based on the company’s confidence in its higher guide, and it outlined a number of initiatives for 2022 that sums up to this team being more bullish about its outlook than we can recall in all the years we’ve covered it since the IPO in 2012. It pushed its sourcebook (i.e. new product) launch as well as the new Contemporary line to the Spring of 2022 – largely due to supply chain disruptions that the entire planet is dealing with right now. We’re perfectly fine with that. It also pushed the launch of its Guest House initiative until Spring – even though its largely ready to go this fall – as management would rather make more of a splash in the hospitality business when the pandemic is (hopefully) less severe than it is today.
Importantly, RH did not push out the launch of RH England, which was one of our few concerns headed into this print. That’s still scheduled for a 1H kick-off, with management guiding a year 1 range of anywhere between $50mm and $250mm. Yeah, kind of a laughable range, but we couldn’t care less where year one comes in. How we’re doing the math, this is likely to be a $1.5-$2bn business for RH (management guiding closer to $1bn), not to mention the launch of RH Paris, which has an almost identical population count as the UK (each has between 65-70mm people). Compare that to the state of California, which has 39mm people and is an $800mm business for RH. Then tack on Italy (60mm), Germany (83mm), and the rest of Europe. That doesn’t even take Asia into account. The punchline is that near-term demand is stronger than expected in the US, and is more likely to be a soft landing than a hard correction when it ebbs. As that happens, the company will be opening up new geographies and building up its experiential luxury home ecosystem globally, which should keep ~20% top line growth for the foreseeable future.
On one hand, we’re mildly concerned that near-term expectations are getting elevated. People are finally starting to ‘get’ the story over a 1-2 year basis. But on the other hand, few – if any – are correct in modeling what this company cranks out in years 3-5. How we’re doing the math, by year 5 of the model we’re at between $7.5bn and $8bn in revenue at a 25% EBIT margin. That gets us to $50 per share in earnings. Yes…$50. The Street is at $32 in Year 5. Before this print, our estimate was closer to $40…but the ecosystem RH is building is coming together stronger and faster than even we modeled – and we’re more bullish on this name than anyone on the Street.
Did we mention that RH upped its ROIC guide up to 70% (from 60%) for this year? It’s almost an insult to compare this company to the US-focused (geo-centric) group of US retailers that it’s commonly caught up in. Unlike traditional retailers, RH has real pricing power, as evidenced by higher prices offsetting higher freight costs this quarter. The global growth angle here in luxury furniture and home furnishings, restaurants, hotels (Guest House), and tangential business like luxury yacht and aircraft experiences simply cannot be replicated.
So we’re looking at TAIL earnings power of $50, 70% return on invested capital, a truly massive global competitive moat, no real peers, and on top of that a bullet proof balance sheet that will have $125 per share in net cash on its balance sheet by year 5 – if our operating model is correct.
The question then is what this is worth. We could easily argue that this is worth 40x-50x earnings given the characteristics noted above. That suggests a $2,000-$2,500 stock in five years vs sub-$700 today. Again, you need to really look out past year 1 and 2 and get creative and imaginative as to what this team can execute on a global scale as it builds up an ecosystem around the high-end home and the luxury consumer. You can debate our modeling assumptions – or the speed at which the company can get this global growth plan done. You can also correctly assume that somewhere down the line, there will be a miss, a negative trend, a slowing of the category overall, and some brutal days for the stock. But it’s undeniable to us the trajectory of where this company, this model, and ultimately the stock are all headed.
Best Idea Long
