Conclusion: RH has one of the most ‘Macro Aware’ management teams in retail. It guides to what business will be like in 3-6 months, not how it’s trending today. The latter is how you get in trouble (and is how 95% of retail management’s roll). RH will do it right. Quad 4, which Friedman respects, says that’s a lower guide for 2-3 quarters. From a product and branding perspective, it is going on full offense at the exact time the consumer is retrenching – that’s what great brands like Amazon and Nike do. They invest to grow (and RH is doing it in a capital light way) while competitors cut costs and close stores. RH is one of the few brands with asymmetric drivers to the business over a TAIL duration. This was a 10-bagger at $30 – we made that call. And by the time we have ‘proof of concept’ Internationally and its global footprint grows aggressively, I think this is a $2,000 stock. Doubt/chirp/hate all you want. I’m a big boy. I can take it. But I like being right on the BIG calls. And this is one of them. Until then RH will be happy to buy 60% of the float with its war chest during Macro Quad 4. Best Idea Long – and one of the few core long-term holdings in retail.
DETAILS
I think the RH quarter tomorrow will look fine on revenue and EPS. It’s the guidance that I worry about. Remember, Friedman was the CEO who I called ‘Macro Aware’ two quarters ago when he foretold that businesses would be guiding down/falling apart materially in 2H. He was spot on. In the 13 weeks since the company last reported, Macro has gotten worse, not better. Companies have blown up left and right. My money is on the company talking down numbers. People love to use WSM as a proxy (which is a mistake, it sells to middle America while RH sells to the top 10% of the population), and that company put out a respectable/borderline impressive quarter, and gave an ‘extend the trend’ guide, which I absolutely do not think is believable. It’s a Best Idea Short.
RH, on the other hand, is in limbo. It just launched the RH Contemporary line, and is deploying capital to build a MASSIVE brand in Europe. But neither of those will manifest into meaningful revenue streams until early-mid 2023. Ironically, that’s when we near the end of Quad 4. I like when companies invest when the top line is tough. That’s how Nike and Amazon roll – and I put RH in the same class. That’s how I run my own business. It’s how you gain share, and ultimately come out in the end #winning.
My Retail playbook is that (as we already know) companies are guiding down 3Q left and right. But 4Q guidance isn’t low enough. The consumer will stretch around holiday, deplete their savings, lever up, and completely dry up in 1Q. All while the housing market is hitting a wall. Clearly, The Home is not a fun place to be in that environment. Then we get FY23 guidance by April/May and after retail getting its teeth kicked in, it will kitchen sink the year, which will FINALLY jibe with us being in Macro Quad 4 – 4 of them to be exact. That’s when we make the call to be long retail big time. I’m not talking 20-30% gains – but 100% on earnings and multiple expansion. Make no mistake, RH is one of the few companies that budgets its business based on demand that it will likely see in 3-6 months – not (like WSM) that guides based on what it’s seeing today.
Bottom line is that 2H numbers are likely to come down, and I think that sets up RH for a meaningful acceleration in earnings in 2023 – one of the very few retailers that should fit that bill. RH Contemporary will be in full swing, the build out of Europe will start to contribute to both revs and Gross Margins, and lets not forget that sometime before Quad 4 is over, the company is likely to deploy its $2.5billion in cash to repo up to 60% of the float. That gives this stock MASSIVE support on a selloff. Though he didn’t tell me this outright think Friedman’s ‘buy with impunity’ price is below $200. I don’t think we’ll see that level soon.
Could Friday be an ugly stock day? Yep. But that doesn’t shake my confidence in the model that TAIL earnings power is understated by 100%. People chirp me on twitter all day that I’m wrong on this stock, that the brand is losing share, and that the company is foolish to open Europe when it’s facing an energy crisis and is likely in a recession. But I think that’s the EXACT time to open up Europe. When ‘competitors’ (mostly Mom and Pops) are pulling back, cutting costs from their business, just at the time RH goes on offense to gain share in the most affluent markets in Europe with what are likely to be the most impressive (and capital light) retail stores of any sort anywhere in the world.
Over a 3-5 year timeline, I think RH has $60 in EPS power. Yes, $60. That compares to the Street closer to $30. If I’m right on that model, and the large scale rollout throughout Europe, which I think I am (tho won’t be without its logistical speedbumps), this company will get at least a pseudo luxury multiple of 20x earnings – or a $1,200 stock. As it gets ‘proof of concept’ in Europe and then targets the Middle East and Asia, that’s when it gets a full-on Global luxury home furnishings multiple on a higher earnings stream, and sentiment completely turns on this name. I know it sounds like a ridiculous call at $250, but I think that this is ultimately a $2,000 stock. And barring a complete botch of execution Internationally (which most bears tell me will be a #fail – and I vehemently disagree with), I think this is a $2,000 stock over 3-5 years. People thought I was nuts when I called this a 10-bagger at $30. It was a rough road, and I was wrong for extended periods of time. That hurt, but in the end it paid off. It’s gonna pay off again.
One of my biggest concerns over the next 1-2 years from is that RH gets sold to the likes of Berkshire or LVMH. What’s that worth? $600? That’s highway robbery. Friedman’s price target is arguably higher than mine – and not by a little. I think it’s highly unlikely that this company gets sold, particularly with Friedman as a 21% shareholder. He has a hugely vested interest in letting this story evolve into what it was meant to be.
